Working capital

Financial Term

Working capital consists of cash and other short-term financial assets such as accounts receivable that can be used to meet current financial needs such as paying to grow or replace inventory and other accounts payable.

While the need for working capital can increase or decrease temporarily – for example, for large seasonal inventory purchases that aren’t made in the off-season, or for expenses that must be paid ahead of a large contract that eventually will generate cash – for most businesses working capital requirements never go to zero.

When companies grow their revenue, their need for working capital very often grows as well – inventories must get bigger, accounts receivable grow larger. This is one of the most common reasons that businesses need financing.

Don Gooding

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