Understanding Working Capital — The Lifeblood of Your Business

If you've ever wondered how financially "healthy" a business really is, one of the first things to look at is its working capital. Working capital (also called net working capital) measures the difference between a company’s current assets and current liabilities—and it’s one of the simplest ways to assess short-term financial health and liquidity.

Let’s break it down.

📊 What's On the Balance Sheet?

On a specific date, your balance sheet gives a snapshot of:

• Current Assets (<1 year):
  Cash, marketable securities, accounts receivable, inventory, and other short-term assets.

• Current Liabilities (<1 year):
  Payables, short-term debt, and accrued expenses.

Subtracting liabilities from assets gives you your working capital. And depending on how deep you want to go, there are three ways to calculate it:

1. Simple

Current Assets – Current Liabilities

2. Narrow

Current Assets (minus cash) – Current Liabilities (minus debt)

(This removes extremes like excess cash or short-term loans)

3. Specific

Accounts Receivable + Inventory – Accounts Payable

(Laser-focused on operations-related capital flow)

🤔 Why It Matters

A positive working capital means a business can cover short-term expenses and has financial wiggle room.
A negative one? It might signal trouble ahead—or at least a need to reassess cash flow management.

Whether you're buying, selling, or scaling a business, understanding working capital is essential. It's more than just a number—it tells a story about how well a business can survive and thrive in the short term.

Want help assessing the financial health of a business you own—or one you’re thinking about acquiring?

Let’s talk.