Working capital is your current assets minus your current liabilities. Current assets include cash, inventory and money customers still owe you. Current liabilities include supplier invoices and taxes due within a year. The difference shows what is left to fund day-to-day operations.
An example. With 90,000 euros of current assets and 55,000 euros of current liabilities, working capital is 35,000 euros.
Working capital measures whether you can pay the bills falling due in the next twelve months. Positive working capital means current assets cover short-term debts. Negative working capital means you depend on new money arriving quickly.
Worked example for a shop. Cash 20,000 euros, inventory 55,000 euros, unpaid customer invoices 15,000 euros: current assets of 90,000 euros. Supplier invoices of 40,000 euros and VAT owed of 15,000 euros: current liabilities of 55,000 euros. Working capital is 35,000 euros. Now the shop spends its 20,000 euros of cash on extra stock. Inventory rises to 75,000 euros and cash falls to zero. Working capital is still 35,000 euros, but the shop cannot pay a single invoice next week.
That is the point most founders miss: working capital is not cash. Inventory counts as a current asset even if nobody wants to buy it. Customer invoices count even if the customer pays after 90 days.
The second misunderstanding concerns growth. Growing companies usually need more working capital, not less. If you sell more, you buy more stock and you wait for more invoices to be paid. A business that doubles revenue may have to fund an extra 50,000 euros tied up in inventory and receivables before the extra profit arrives. This is why profitable companies still run out of money.
Three levers change working capital: sell inventory faster, get customers to pay sooner, and negotiate longer payment terms with suppliers. Each one frees cash without raising a single euro from outside.
