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 darn 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 liabilities — 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 your well is starting to run dry and you’ll need to put additional cash into the business to continue operating.

Working capital is fairly straightforward to calculate, the basic formula is current assets - current liabilities = working capital. However, there can be a bit more to it than that in the real world. Essentially, you have to develop a feel for which accounts are involved and how money moves in and out of the business on a daily, weekly, and monthly basis. Learning how to to do that takes some time and practice.

For example, I’d say that current assets normally includes your bank balance + undeposited funds + accounts receivable, while current liabilities typically includes your credit card balance + accounts payable + estimated operating expenses (like payroll and rent). However, there could be other items involved like contractor payments, tax liabilities, and any vendor bills 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 key 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 revolving credit lines are so helpful for growing companies: because they provide a reliable, accessible source of working capital whenever you need it.