Working capital

Current assets minus current liabilities — the money tied up in running the business day to day, mostly receivables and payables.

Example

£40,000 owed to you by customers, minus £15,000 you owe suppliers, is £25,000 of working capital locked up in the operating cycle.

Important

Growth consumes working capital. Every new invoiced customer widens the gap between doing the work and being paid for it, which is why fast-growing companies run out of cash while profitable.

Related terms

• Accounts receivable — Money customers owe you for work already delivered.
• Accounts payable — Money you owe suppliers for things already received.
• Cash flow — The actual movement of money in and out of your bank account, as distinct from revenue you have earned but not been paid.
• Balance sheet — A snapshot at one moment of what you own (assets), what you owe (liabilities), and the difference (equity).
• DSO (Days Sales Outstanding) — The average number of days between invoicing a customer and being paid. (Accounts receivable ÷ revenue) × days in the period.

Lessons that explain it

• Working capital and why growth eats cash — The money trapped between doing the work and being paid for it. It is why profitable, growing companies run out of money — and it is the cheapest financing you are not using. (12 min)

All 176 terms in the Founder glossary