Working Capital

Concept

Working capital is the difference between a company's current assets and current liabilities. It measures short-term liquidity: can the business cover its near-term obligations with its near-term resources? Positive working capital means the company has a cushion. Negative working capital means it relies on future cash inflows or external financing to stay solvent.

Intuition

Working capital is the operational grease that keeps a business running between when it pays for inputs and when it collects from customers. A retailer buys inventory, sits on it, sells it, then waits 30 days for credit card settlement. That entire cycle ties up cash.

Companies with negative operating working capital (like Amazon) collect cash from customers before paying suppliers. That's a financing advantage—customers fund the business.

Companies with high working capital (like manufacturers with long inventory cycles) have cash trapped in operations. They need more capital to grow, which reduces Free Cash Flow.

Components

Interview Script

Working Capital is the difference between current assets and current liabilities, and it measures whether a company can cover its near-term obligations with its near-term resources. It's essentially the operational cash tied up between when you pay for inputs and when you collect from customers. Companies with negative working capital, like Amazon, actually have an advantage because they collect from customers before paying suppliers, while companies with high working capital have more cash trapped in operations, which reduces free cash flow.