What is Working Capital?
Working capital is the difference between a company's current assets (cash, inventory, accounts receivable) and current liabilities (accounts payable, short-term debt, accrued expenses). It measures short-term liquidity and operational efficiency, indicating whether a company can meet its near-term obligations.
Working capital management is critical for business health. Too little working capital creates liquidity crises—a profitable company can go bankrupt if it cannot pay suppliers on time. Too much working capital means cash is tied up in inventory or receivables instead of being invested productively.
The three key levers of working capital are: Days Sales Outstanding (DSO)—how quickly customers pay; Days Inventory Outstanding (DIO)—how long inventory sits before being sold; and Days Payable Outstanding (DPO)—how long the company takes to pay suppliers. The Cash Conversion Cycle (CCC = DSO + DIO − DPO) measures the total days between paying for inputs and collecting from customers.
In case interviews, working capital often appears in operations and profitability cases. A company with deteriorating working capital might be experiencing slowing collections, inventory buildup, or pressure from suppliers demanding faster payment. Optimizing working capital can free up significant cash without any revenue growth—making it a quick win in turnaround situations.
Real-world example
Amazon operates with negative working capital: it collects payment from customers immediately but pays suppliers on 60-90 day terms. This means suppliers effectively finance Amazon's operations, freeing billions in cash for investment.
Related terms
Burn Rate
Burn rate is the pace at which a company spends its cash reserves before generating positive cash fl…
Inventory Turnover
Inventory turnover measures how many times a company sells and replaces its inventory within a given…
Supply Chain Management
Supply chain management (SCM) encompasses the planning, execution, and optimization of all activitie…
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