What Is Working Capital?

Working capital is the difference between a company's current assets and its current liabilities. It tells you how much money is tied up in day-to-day operations, in inventory, receivables and cash, beyond what the company has to hand back within a year to suppliers, employees and lenders. It is the cushion that funds the everyday running of the business.

How it's calculated#

Working capital = Current assets - Current liabilities

Current assets are everything the company expects to turn into cash within a year: cash in the bank, short-term investments, money owed by customers and inventory. Current liabilities are everything it has to pay over the same period: supplier invoices, taxes, wages, and debt payments due within twelve months.

Say a store holds $10 million of inventory, $2 million of receivables and $3 million of cash, $15 million of current assets in total. It owes suppliers and its bank $12 million over the next year. Its working capital is $3 million. Divide the same two numbers instead of subtracting them and you get the current ratio, 1.25 here.

A real example#

At the end of its fiscal 2025, on August 31, 2025, Costco had $38.38 billion of current assets and $37.11 billion of current liabilities. Working capital came to $1.27 billion, an almost symbolic amount next to $275 billion of annual revenue. A year earlier it was negative: minus $1.22 billion.

For a retailer with more than $18 billion of goods on its shelves, that can look like the absence of a cushion. The mechanism runs the other way. Costco closed the year with $18.12 billion of inventory and $19.78 billion of accounts payable, so it owed its suppliers more than everything in its warehouses was worth. Members pay at the register immediately, suppliers wait weeks for their money. In effect, suppliers finance Costco's inventory, not shareholders and not a bank.

It is one of the most underrated parts of the large-retailer model. Low or negative working capital means that growing sales does not require putting more cash in; it releases cash instead.

How to read it#

Working capital reads differently in three contexts. By industry: a machinery maker with a long production cycle needs a lot of working capital, a retailer with fast-moving stock needs little. Over time: working capital that climbs while sales stay flat usually means inventory is piling up or customers are paying more slowly. In the cash flow statement: every increase in working capital lowers operating cash flow, because the money is sitting in a warehouse or with a customer.

That last link is the most practical one. A company that reports rising profit while swelling its inventory and receivables can show operating cash flow far weaker than its earnings, and the gap sits in the change-in-working-capital lines of the cash flow statement.

What to watch for#

Negative working capital is a strength only when the business model produces it, as at Costco. The same minus sign at a company that has stopped paying suppliers on time, or that rolls over a short-term credit line every quarter, is a liquidity risk. The composition decides it: how much of current liabilities is supplier invoices and how much is debt.

The second trap is window dressing at period end. A company can speed up collections or delay supplier payments just before the balance-sheet date so that working capital and cash flow look better. Comparing several consecutive quarters shows whether the change is lasting or a one-day move.

Related terms#

The current ratio arranges the same two numbers as a quotient. Free cash flow moves directly with changes in working capital. Where to find both totals on the balance sheet is covered in how to read a balance sheet.