Working Capital: What It Is & Why It Matters

Working capital is your current assets minus current liabilities (CA – CL)

Current assets are things like: 

  • 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 $163B in current assets and $106B in current liabilities. This gives us $57B in 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: 


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


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

Alright let’s shift to the negative rendition: 


  • 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


  • 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 (via 

That wraps up this week’s accounting breakdown. 

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