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What is Working Capital?

Highlighted from a real earnings story. Explained by Clicked.

Used in a sentence

The retailer drew on its credit line to cover a seasonal working capital squeeze ahead of the holidays.

The reader highlighted one word mid-article. Clicked explained the finance term “working capital” in plain language:

Explained in three depths

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Overview

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Working capital is the money a business uses for its daily operations, calculated as what it owns short-term minus what it owes short-term. It measures short-term financial health: whether the company can fund its operations and meet its obligations over the coming months.

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Detail

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Current assets are things that are cash or will become cash within a year: cash itself, inventory waiting to be sold, invoices customers have not paid yet. Current liabilities are the bills due within a year: supplier invoices, short-term loans, taxes, payroll. Working capital is the first minus the second: positive means the resources arriving over the next year cover the obligations landing in that window. The number matters because of timing: a business pays before it collects, buying inventory in March and collecting in June, while rent and payroll come due every month in between. When the gap outgrows the resources covering it, you get the classic failure: a profitable company missing Friday's payroll because its profit is trapped in stock and unpaid invoices, the working capital squeeze. Fast growers are its usual victims, since growing means fronting more inventory for larger orders. Some businesses flip the sign on purpose: collect from shoppers today, pay suppliers in 60 days, and the customers' money funds the store.

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Analogy

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A food truck caters a wedding: $800 of ingredients bought Monday, service on Saturday, and the venue pays its invoice 30 days later. The profit is real, but for those five weeks the truck still owes gas, wages, and the parking permit in cash. The money that carries the truck through the stretch between paying for the food and collecting for it is the working capital; run out mid-stretch and the business dies, wedding profit and all.

AI explanations may contain errors · Not professional advice

Same facts, different vibe — Slang mode 😎

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Overview

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Working capital is what a business owns short-term minus what it owes short-term. Positive means the coming year's resources cover the coming year's bills; negative means they do not, or that someone else is funding you. It is the scoreboard of short-term health. 😎

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Detail

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The two halves first: stuff that is cash or becomes cash within a year, cash, inventory, unpaid customer invoices, minus the bills due within a year, suppliers, short-term loans, payroll. That difference is working capital, and positive means the next year funds itself. Why anyone cares is timing: the business pays first, inventory in March, and collects last, customer money in June, while rent and payroll punch the clock every month in between. Let the gap outgrow the resources covering it and you get the classic corpse: a profitable company, dead, because the profit was locked in warehouse stock and unpaid invoices while payroll wanted cash Friday. Growth makes it worse, since growing means fronting ever more inventory for ever bigger orders. And the cheat code exists: collect from customers today, pay suppliers in 60 days, and the store runs on other people's money, negative working capital as a flex instead of a red flag. Depends entirely on which side of the IOU you live on. 😎

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Analogy

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Rent is due on the 1st, your paycheck lands on the 5th. Your salary covers the rent just fine, that is not the problem; the four days in between are the problem. Whatever cash you keep around to survive that gap is your personal working capital, and if it is zero, you are broke four days a month no matter what your salary says.

AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

Working capital is defined as current assets less current liabilities, representing the liquidity available to fund an enterprise's operating cycle. It reflects the financing requirement arising from timing differences between expenditures on inventory and receivables and the collection of revenues, with adequacy assessed relative to the length of the cash conversion cycle.

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