Working capital measures the short-term money a business needs to operate. It is the difference between what it expects to collect and use soon, and what it must pay soon.
Three everyday items
- Receivables
- Money customers owe for goods or services already delivered
- Inventory
- Stock held for sale, plus raw materials and work in progress
- Payables
- Money the company owes suppliers for goods already received
Working capital = Receivables + Inventory − Payables
Suppose Kaveri Agro Ltd has ₹200 crore of receivables and ₹150 crore of inventory, and owes suppliers ₹120 crore. Its working capital is ₹200 + ₹150 − ₹120 = ₹230 crore — money tied up in operations and not yet available as cash.
| Item | Amount | What it represents |
|---|---|---|
| Receivables | ₹200 Cr | Cash to be collected from customers |
| Inventory | ₹150 Cr | Cash already spent on stock |
| Payables | ₹120 Cr | Cash still to be paid to suppliers |
| Working capital | ₹230 Cr | Net cash tied up |
Working capital in numbers for a fictional company.
Positive working capital means cash is tied up in the operating cycle. Negative working capital means suppliers are, in effect, funding the business — some strong retailers and subscription businesses run this way naturally.
Working capital simulator
Working capital is the money tied up in the day-to-day running of a business.
Working capital
₹230 Cr
Interpretation
Cash tied up
Receivables + inventory − payables