This is a little embarrassing to admit but it took me about ten years to understand what working capital is and why it’s so important. When the light bulb finally went off, I said to myself: “Holy cow, this is a crucial number every business owner should understand and keep track of.”

Basically, working capital is a number that tells you if your business has enough resources to cover its current financial obligations — like accounts payable, credit card balances, and upcoming expenses. Higher working capital means your business has enough cash to fund its ongoing operations, while lower (or negative) working capital means the well is running dry and you’ll need to find additional cash to continue operating.

Working capital is fairly straightforward to calculate… that is, if you’re comfortable with accounting and know what you’re doing. The basic formula is current assets - current liabilities = working capital. However, in the real world there’s a bit more to it than that. Basically, you have to develop a feel for which accounts are involved and how money moves in and out of the business on a daily and weekly basis. Learning how to to do this takes time and practice.

For example, I’d say that current assets normally includes your bank balance + undeposited funds + accounts receivable, while current liabilities normally includes your credit card balance + accounts payable + projected upcoming operating expenses (like payroll and rent). However, there could be other items you need to include like upcoming contractor payments, tax liabilities, and any vendor bills that you know are coming but which you haven’t been received yet. You get the idea.

Anyway, my main point is that working capital is a crucial number that every business should try to calculate and monitor on a regular basis. It’s like a fuel gauge that tells you how much gas you have left in your tank.

By the way, that’s why bank loans and credit lines can be so helpful for rapidly growing companies: because they provide a reliable, accessible source of working capital whenever you need it.