Working Capital

Working capital is current assets less current liabilities, the cash effectively tied up in the day-to-day operation of the business. Receivables and inventory are funded; payables to suppliers are a partial offset. Net working capital is positive when AR + inventory exceeds AP; the bigger the positive number, the more cash the business is committing to operations.

The cash conversion cycle, days sales outstanding plus days inventory outstanding less days payable outstanding, is the timing dimension. A business with a 90-day cash conversion cycle effectively self-finances three months of operations; double the revenue and you double the absolute working-capital requirement, regardless of profitability.

Most working-capital problems aren't profitability problems, they're timing problems. The right financing structure (an ABL revolver, a factoring line, an RBF facility) breathes with the cycle: it draws up when AR builds, pays down when cash lands. A fixed term loan funding working capital is usually the wrong structure; the business keeps paying interest on capital that's no longer needed once collection lands.