# What Is Working Capital? - Definition & Formula

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• 0:03 Definition of Working Capital
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Lesson Transcript
Instructor: Tara Schofield
This lesson explains what working capital is, how it is used in a business, and why businesses need working capital to stay functional. We'll also look at the formula used to calculate working capital.

## Definition of Working Capital

Working capital is the amount of cash and liquid assets a company owns. In the normal course of operations, a business must have cash to pay expenses and liabilities that are due. This may include payroll, monthly rent and utility expenses, and other operating costs. Working capital is the money that is available to cover these expenses and is readily accessible.

One of the greatest challenges small businesses face is having enough working capital available. This can be even more difficult if the company offers terms to its customers and must wait for other companies or customers to pay their bills.

## Example

As an example, let's say you run a small auto parts company providing parts to local mechanics with 30-day terms, meaning the mechanics have 30 days after the parts are delivered to pay their bill. Offering terms helps you sell more parts to the mechanics, which is helpful - when they pay their bill. In the meantime, though, you may find you run short on cash until the bills are paid.

In the 30 days before the mechanics pay for their parts, your company may need to purchase additional parts and inventory, pay your employees, and cover other normal operating expenses. If you have been able to save money and keep extra cash available in your company bank account, you have working capital that can be used to cover expenses until you receive payments from the mechanics.

The higher the working capital a company has, the more options are available for that business. If working capital is insufficient, the company can experience significant financial problems and may not be able to continue operating. When a company has no working capital it may suffer because it will not be able to cover the expenses and debts that are due. Unfortunately, this is one of the most significant factors in small business failures.

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