This is a little embarrassing to admit but it took me about ten years to learn 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 track and be aware of.”

Essentially, working capital is a number that tells you if your business has enough resources to cover its current obligations — like accounts payable, credit card balances, and upcoming payroll. Higher working capital means your business has enough cash to fund its ongoing operations, while lower or negative working capital means you’ll need to find additional cash in order 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 lot 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 some 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 balances + accounts payable + major upcoming expenses (like payroll and rent). However, there could be other numbers involved — like your merchant account balance, contractor expenses, sales tax liabilities, and bills that you know are coming but which haven’t been received or entered into the books yet. You get the idea.

At any rate, my main point is that working capital is a crucial number every businesses should try to calculate and track on a regular basis. It’s like knowing how much gas you have in your tank.

By the way, that’s why bank loans and credit lines are so helpful for small, rapidly growing companies: because they provide an additional source of working capital when you need it.