What Is Working Capital?
Working capital is the difference between what a business has readily available and what it owes in the near term — current assets minus current liabilities. In plain terms, it’s a measure of whether a business can cover its day-to-day obligations without straining for cash.
A business can be profitable on paper and still run short on working capital, and a business can carry thin margins and still have plenty of breathing room. It’s a liquidity question, not a profitability question — and it’s one of the first things a lender looks at when deciding whether a business can actually support new debt.
Why Lenders Care
A lender isn’t just asking whether your business made money last year. They’re asking whether it has enough cash on hand, right now, to keep operating while it also carries a new loan payment. A business with strong revenue but weak working capital can look far riskier to a lender than a smaller business with less top-line revenue but a healthier cash position.
That’s part of why two businesses with similar revenue can get very different answers from the same lender — the numbers on the surface tell one story, but working capital tells the lender something closer to the real one.
Reading Your Own Numbers Before a Lender Does
Understanding your working capital position is part of the Understand stage of the FUND Method — reading your own financials the way a lender will, before they ever see the file. That’s not a formula you memorize once. It’s a habit that changes how you prepare every file going forward.
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