Working Capital

What is working capital?

Working capital (also called net working capital or NWC) is the amount of liquid resources a company has available after covering all obligations due within the next 12 months. It is the financial cushion between what the business owns short-term and what it owes short-term. Operators use it to gauge whether the company can fund daily operations, pay suppliers, and invest in growth without seeking additional financing.

Working capital problems kill more companies than profitability problems. A business can report strong gross margins and positive EBITDA while simultaneously running out of cash because receivables are slow, inventory is bloated, or payables are coming due faster than collections arrive. Working capital is the operating metric that catches this gap.

For B2B SaaS companies with recurring revenue, working capital is typically straightforward — deferred revenue is the main liability, and cash from prepaid subscriptions is the main asset. For B2B companies with inventory, services, or project-based billing, working capital management becomes more complex. The benchmark working capital ratio (current assets / current liabilities) is 1.2-2.0x. Below 1.0x means liabilities exceed liquid assets. Above 3.0x may indicate excess cash sitting idle.

Working capital is not the same as cash. A company can have strong working capital because of large accounts receivable — money owed but not yet collected. That looks good on paper until those receivables age past 90 days and become uncollectible. Working capital composition matters as much as the total.

Why working capital matters for operators

Operators who track only revenue and margin miss the liquidity picture entirely. Working capital answers the question margin cannot: can you pay next month's bills with what you have today?

A $15M revenue company with 25% EBITDA margins appears healthy. But if $2.1M in accounts receivable is past 60 days, inventory has grown 40% faster than revenue, and a $500K tax payment is due in 6 weeks — working capital may be negative. The P&L says profit. The balance sheet says danger. Working capital connects the two.

The practical cost of weak working capital is lost optionality. Companies with thin working capital cannot negotiate early-payment discounts from suppliers (typically 2% for net-10 vs. net-30). They cannot invest in inventory ahead of seasonal demand. They cannot absorb a late-paying customer without scrambling. A mid-market B2B company with $800K in working capital has options. The same company at $50K in working capital has constraints.

Working capital formula

Working Capital = Current Assets - Current Liabilities

Working Capital Ratio = Current Assets / Current Liabilities

Example:
Current Assets:
- Cash and equivalents: $1,240,000
- Accounts receivable: $890,000
- Inventory: $340,000
- Prepaid expenses: $95,000
Total current assets: $2,565,000

Current Liabilities:
- Accounts payable: $420,000
- Accrued expenses: $310,000
- Deferred revenue: $680,000
- Short-term debt: $150,000
Total current liabilities: $1,560,000

Working Capital = $2,565,000 - $1,560,000 = $1,005,000
Working Capital Ratio = $2,565,000 / $1,560,000 = 1.64x

What each component means:

• Current assets: Resources expected to convert to cash within 12 months. Cash is immediate. Receivables depend on collection. Inventory depends on sales velocity.
• Current liabilities: Obligations due within 12 months. Payables are fixed. Deferred revenue (especially in SaaS) represents services owed but already paid for.

Note for SaaS: deferred revenue inflates current liabilities. A SaaS company with $2M in annual prepaid subscriptions shows $2M more in current liabilities — but it also holds the cash from those prepayments. This makes working capital ratios for SaaS companies look lower than for non-SaaS companies at the same health level.

Working capital benchmarks by company type

How working capital ratios vary across B2B company segments.

Sources: Hackett Group Working Capital Survey 2025, PitchBook SaaS Financial Benchmarks 2025, industry-observed ranges based on operator reports.

Common mistakes when measuring working capital

1. Ignoring the composition of current assets

A company with $3M in current assets sounds liquid. But if $2.2M of that is inventory and only $300K is cash, the business cannot pay a $500K obligation next week without selling inventory first. Always break working capital into its components. Cash and receivables under 30 days are truly liquid. Aging receivables and slow-moving inventory are not.

2. Not adjusting for deferred revenue in SaaS

SaaS deferred revenue is a current liability (services owed), but it does not require a cash outlay — you already collected the money. A SaaS company with $1.5M in deferred revenue and a 0.9x working capital ratio may be healthier than the ratio suggests. Calculate adjusted working capital: current assets minus (current liabilities minus deferred revenue).

3. Measuring working capital only quarterly

Working capital fluctuates within quarters. Payroll hits biweekly. Tax payments are lumpy. Large customer payments arrive unpredictably. A healthy quarter-end snapshot can mask a mid-quarter cash crunch that required an emergency credit line draw. Track monthly at minimum.

4. Conflating working capital with free cash flow

Positive working capital means you can cover short-term obligations. Positive free cash flow means the business generates cash after all investments. A company can have strong working capital (large current assets) and negative free cash flow (spending more than it earns). They measure different things. Track both.

5. Letting working capital grow unchecked

Excess working capital (ratio above 3.0x) means cash is sitting idle. That capital could reduce debt, fund product development, or earn returns. Working capital should be sufficient, not excessive.

How Fairview tracks working capital automatically

Fairview's Margin Intelligence connects to your accounting platform (QuickBooks, Xero) to pull balance sheet data monthly. Current assets and current liabilities are categorized automatically. For SaaS companies, Fairview calculates both standard working capital and deferred-revenue-adjusted working capital so the ratio reflects actual liquidity.

The Operating Dashboard displays working capital trended alongside EBITDA and gross profit. When the working capital ratio drops below your threshold or the composition shifts materially (e.g., cash drops 30% while receivables grow), the Next-Best Action Engine surfaces the specific issue: "Working capital ratio fell to 1.05x. Accounts receivable over 60 days increased from $180K to $410K. Review collection process."

→ See how Margin Intelligence works

Working capital vs free cash flow

Working capital answers: "Can we cover our obligations right now?" Free cash flow answers: "Is the business generating more cash than it consumes?" A company needs both — adequate working capital for stability and positive free cash flow for growth. A company with strong free cash flow but deteriorating working capital is spending cash as fast as it generates it.

FAQ

What is working capital in simple terms?

Working capital is the money a business has available after accounting for everything it owes in the next 12 months. Take all short-term resources (cash, money customers owe you, inventory) and subtract all short-term obligations (supplier bills, upcoming payments, deferred revenue). The result tells you whether the business can fund daily operations from its own resources.

What is a good working capital ratio for a B2B company?

For most B2B companies, a working capital ratio between 1.2x and 2.0x is healthy. Below 1.0x means current liabilities exceed current assets — a liquidity concern. SaaS companies with large deferred revenue balances often show ratios between 0.8x and 1.2x, which looks low but is normal because deferred revenue does not require a cash payment.

How do you calculate working capital?

Subtract current liabilities from current assets. Current assets include cash, accounts receivable, inventory, and prepaid expenses. Current liabilities include accounts payable, accrued expenses, deferred revenue, and short-term debt. Example: $2.5M in current assets minus $1.5M in current liabilities = $1M in working capital.

What is the difference between working capital and free cash flow?

Working capital is a balance sheet snapshot — how much short-term liquidity exists right now. Free cash flow is a period measurement — how much cash the business generated minus what it spent on investments. You can have strong working capital (large current assets) and negative free cash flow (spending exceeds earnings). They answer different questions.

How often should you track working capital?

Monthly at minimum. Weekly if cash is tight or the business is in a high-growth phase. Working capital fluctuates with payroll cycles, tax payments, and customer collection timing. Monthly tracking catches trends before they become crises. Pay attention to the components — the composition matters as much as the total.

How do you improve working capital?

Collect receivables faster (tighten payment terms, follow up on aging invoices). Reduce inventory levels (improve inventory turnover, clear slow-moving stock). Negotiate longer supplier terms (extending DPO by 15 days frees cash). Avoid over-investing in prepaid expenses. Each lever has trade-offs — extending DPO too far can damage supplier relationships.

Related terms

• Cash Conversion Cycle — Days between paying suppliers and collecting from customers, the timing component of working capital
• Gross Profit — Revenue minus COGS, the margin that funds working capital
• EBITDA — Operating profitability that ultimately generates the cash flowing into working capital
• Burn Multiple — Net burn divided by net new ARR, measures how fast the company consumes working capital
• Inventory Turnover — How quickly inventory converts to sales, directly affects the asset side of working capital

Fairview is an operating intelligence platform that tracks working capital alongside EBITDA, gross profit, and the cash conversion cycle. Start your free trial →

Siddharth Gangal is the founder of Fairview. He built working capital monitoring into the platform after watching a $9M ARR company with healthy margins struggle to make payroll — because no one tracked how fast receivables were aging while inventory kept growing.