Working capital is the money available for day-to-day operations, calculated by subtracting current liabilities from current assets, and it ensures a company can cover its short-term expenses and obligations.
Starts at $0 + state fees and only takes 5-10 minutes
Last Updated: February 17, 2026
Working capital is essentially a calculation: working capital equals a company’s assets minus the company’s liabilities. Understanding a business’s working capital is one way investors and financial experts determine whether it can withstand economic ups and downs.
To understand the definition of working capital, an entrepreneur first needs to understand the definitions of assets and liabilities. A company’s assets (for the purposes of calculating working capital) include cash and other assets that the business can sell and convert to cash within a year. A company’s liabilities include items such as payroll, accounts payable, and loans due within a year.
Working capital is classified as either positive or negative. If a company has positive working capital, its current assets are greater than its current liabilities. However, negative working capital means that the business’s liabilities exceed its current assets.
One advantage of working capital is that a business with positive working capital is more likely to attract investors. Potential investors would likely feel more comfortable investing in a company with positive working capital because it’s much more likely to meet its ongoing financial obligations.
Having positive working capital can help an entrepreneur grow their business, invest in new opportunities, and fulfill customer demands quickly. It also shows that a company can fulfill its obligations and thrive.
Some say that while having some positive working capital is good, having too much isn’t good. For example, having too much working capital may show that a business is unwilling to invest in new growth opportunities.
The disadvantages of negative working capital are even clearer. Having negative working capital may mean the business is paying invoices late, delaying customer orders, or even on the brink of bankruptcy.
Some businesses take out loans or credit lines to increase their short-term working capital to meet their ongoing obligations. If an entrepreneur takes out a line of credit, it shouldn’t be larger than what they can afford to repay.
Working capital is also called “net working capital” or “NWC.” Net working capital’s meaning is the same as working capital: a company’s current assets minus a company’s current liabilities.
Suppose someone owns a shoe business. They have inventory worth $10,000, $20,000 in cash in the bank, and $10,000 in outstanding invoices. These items are considered their short-term assets, totaling $40,000.
However, the shoe business owner also has to pay their workers $5,000, their rent and utilities are $15,000, and they owe $10,000 on a revolving line of credit that is due within the year. These are their short-term liabilities, totaling $30,000.
In this example, the shoe company has $10,000 in working capital. Because the short-term assets exceed the short-term liabilities, the shoe company has positive working capital. Conversely, if the company had to pay more rent or owed more in short-term debts, it would have negative working capital.
Recommended articles
Understanding the definition of working capital and other business terms may seem confusing. Luckily, ZenBusiness is available to help. They can help anyone start an LLC or corporation with one of their ZenBusiness Formation Plans. Formation plan customers even get a free accounting consultation. Once a business is up and running, the Worry-Free Compliance service makes it simple to keep the company on track.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
Ready to Start Your Business?
Scan to download
the ZenBusiness app
