Working capital is the lifeblood of a company’s day-to-day operations. Managing it well ensures the business can meet short-term obligations, maintain operational stability, and avoid unnecessary borrowing. Poor working capital management, on the other hand, can lead to cash flow crises — even for profitable firms.
What Is Working Capital?
It reflects the short-term liquidity of a company. Positive working capital means a firm can cover its current obligations with its current assets. Negative working capital can either be a red flag or a sign of efficiency, depending on context.
Current Assets
Accounts Receivable
Prepaid Expenses
Accounts Payable
Short-Term Debt
Operating vs. Non-Operating Working Capital
Operating Working Capital=(A/R + Inventory – A/P)
Why Working Capital Matters
Impacts cash flow and borrowing needs
Affects valuation—especially in cash flow-based models
Amazon’s Negative Working Capital Model
Construction Firms with High Working Capital
Strategies for Optimizing Working Capital
Offer early payment discounts
Use digital invoicing for faster turnover
Implement just-in-time systems
Liquidate obsolete inventory
Negotiate longer payment terms
Avoid late fees that hurt creditworthiness
Build rolling 13-week cash forecasts
Market Context and Capital Efficiency
Focus may shift to aggressive expansion, sometimes at the cost of working capital efficiency
? Bear Market
Companies with tight working capital cycles outperform
✨ Recovery Phase
Metrics to Monitor
Current Ratio=Current Assets / Current Liabilities
Cash Conversion Cycle (CCC)=DIO + DSO – DPO
Red Flags in Working Capital Management
Inventory spike without matching sales growth → demand misalignment
Rising short-term borrowing to fund operational gaps
Company A (Lean Operator)
Inventory: $1.2B
Working Capital: +$600M
Strong cash flow. Manages suppliers and inventory well.
A/R: $1.1B
A/P: $900M
CCC: 75 days
Tips for Investors and Analysts
Watch for sudden changes in A/R or inventory levels
Read management discussion for inventory and collections commentary
We at ForexLive.com (evolving to investingLive.com later this year) are continuing to educate investors. In this case, understanding working capital is critical to assessing how efficiently a company runs—and whether it can stay liquid while growing.
A profitable business can still run out of cash. Working capital management ensures it doesn’t.
This article was written by Itai Levitan at www.forexlive.com. Read More Details
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