Working Capital: What It Is & Why It Matters

Working capital is your current assets minus current liabilities (CA – CL). Current assets are things such as: 

• Cash in the bank.
• Accounts receivables (money that needs collecting).
• Inventory.
• Investments.

Current liabilities are things like: 

• Accounts payable (bills you need to pay).
• Short-term debt.
• Current portion of long-term debt.
• Unearned revenue outstanding (similar to A/R).

Apple’s (AAPL) latest 10-K reported $163 billion in current assets and $106 billion in current liabilities. Therefore, this gives us $57 billion positive working capital. 

Positive & Negative Working Capital

Working capital has two forms: positive and negative.

• Positive: You have excess cash to pay for the daily operations of the business (salaries, creditors, suppliers, rent, etc.).
• Negative: You do not have current cash to pay for daily operations, but instead use suppliers and customers to fund expenses.

The Pros & Cons of Positive & Negative Working Capital

There’s benefits and downsides to both types of capital cycles. Let’s start with positive working capital: 

Pros: 

• You have a good cash buffer for unexpected expenses.
• Can fund growth and future opportunities with cash.

Cons: 

• High working capital could be due to too much inventory or inability to reinvest in the business.

Now, let’s shift to the negative rendition:

Pros: 

• Fund operations through suppliers and customers.
• Generate cash from customers before you have to pay your current liabilities.
• Ideal for businesses with high turnover in product/sales.

Cons: 

• Without growth, WC eats away at profits.
• Lose money if customers don’t pay on time (i.e., higher A/R).
• Doesn’t look good for bank funding/liquidity.

Which Cycle Works Best?

The answer: it depends. 

It depends on the industry you’re in and the growth trajectory of the internal business. Companies that enjoy negative WC cycles include: Online retailers, grocery stores, restaurants, and telecom companies (Source: financialexpress.com).