Working Capital Management: Keep Your Business Liquid
Financial Planning · 2025-12-25 · 6 min
Working capital is the cash available to run your daily operations. Too little and you cannot pay bills. Too much and your money is not working for you. Here is how to optimize it.
Working capital equals current assets minus current liabilities. Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, short-term debt, and accrued expenses. Positive working capital means you can pay your near-term obligations. Negative working capital means you might not be able to.
The working capital cycle measures how quickly cash flows through your business: days inventory outstanding plus days sales outstanding minus days payable outstanding. A shorter cycle means cash comes back faster. A manufacturing company that holds inventory for 60 days, waits 45 days for payment, and pays suppliers in 30 days has a 75-day cycle.
To improve working capital without additional financing: collect receivables faster (earlier invoicing, shorter payment terms, deposit requirements), manage inventory tighter (just-in-time ordering, reduced safety stock), and negotiate longer payment terms with suppliers. Each day you shave off the cycle frees up cash.
The target working capital ratio depends on your industry. Service businesses with no inventory and quick payment cycles can operate near 1.0. Manufacturing and retail businesses with significant inventory typically need 1.5-2.0. Seasonal businesses need higher ratios before their off-season to cover fixed costs during low-revenue months.
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