What is Working Capital?

Working Capital

Dictionary Definition

This ratio reflects the ability to finance current operations and is a measure of the margin of protection for current creditors. This ratio also indicates how efficiently working capital is being used. A low ratio (close to zero) may indicate inefficient use of working capital. A high ratio (high positive or high negative) often signifies overtrading, creating a vulnerable position for creditors.

Plain English

The capital of a business which is used in its day-to-day trading operations.

The basic formula for working capital is:

Current Assets - Current Liabilities = Working Capital

Why it Matters to You

Working capital is a highly negotiated part of selling any business. Many businesses run a higher than industry average working capital and could leave money on the table when selling.   Having a thorough understanding of your company's WC needs and the industry norm before talking to buyers will help when negotiating the WC PEG.

Blue Sky's Business & Market Strategy Guide does a thorough analysis of working capital.