Understanding working capital: the cash between orders and payment

Working capital is one of those terms that gets used constantly and understood loosely. At its core, it's simple: current assets minus current liabilities, meaning the resources you can turn into cash within a year, minus the obligations coming due in that same window.

Why the gap matters

Between the moment you pay for materials or labor and the moment a customer's payment clears, cash is tied up. That gap, in inventory, in receivables, in work in progress, is where working capital lives. A profitable business can still run into trouble if that gap grows faster than the cash on hand to bridge it.

The levers you actually control

Three levers move working capital: how quickly you collect from customers, how quickly you pay suppliers, and how much inventory or work-in-progress you carry at any given time. None of these levers work in isolation. Tightening collection terms too aggressively can strain customer relationships, and stretching supplier payments too far can strain your own. The goal is a deliberate balance, reviewed regularly, not a one-time fix.

Reading the signals

A few numbers are worth tracking on a regular cadence: days sales outstanding (how long receivables sit before payment), days payable outstanding (how long you take to pay suppliers), and inventory turnover (how often stock cycles through). Watching the trend in these numbers over time tells you more than any single snapshot.

Where planning fits in

Working capital needs shift with the season, with growth, and with the terms you negotiate. A business scaling up often needs more of it before revenue catches up, a fact that surprises owners who assume growth generates cash immediately. Understanding your own cycle, and planning around it, is what turns working capital from a source of stress into a manageable part of running the business.