Cash Flow
What Is Working Capital?
Working capital is current assets minus current liabilities, the capital available to run operations right now. A ratio of 1.2 to 2.0 is healthy; below 1.0 signals liquidity risk; above 2.5 usually means too much cash locked in inventory or slow receivables. For ecommerce operators, inventory is almost always the biggest lever in either direction.
Working capital is current assets minus current liabilities, the operating capital that funds day-to-day business. It's not the same as cash; it includes inventory, AR, and what you owe suppliers in the next 12 months.
How working capital is calculated
Working Capital = Current Assets − Current Liabilities
Current assets: cash + accounts receivable + inventory + prepaid expenses (all short-term).
Current liabilities: accounts payable + accrued liabilities + short-term debt + current portion of long-term debt.
Example
A DTC brand balance sheet: $800K cash + $300K AR + $2.4M inventory + $50K prepaid = $3.55M current assets. AP $900K + accrued $200K + current portion of term loan $300K = $1.4M current liabilities. Working capital = $3.55M − $1.4M = $2.15M. Working capital ratio = $3.55M ÷ $1.4M = 2.54x, possibly over-invested in inventory.
What's a healthy working capital ratio?
- Below 1.0: liquidity risk, can't cover short-term obligations
- 1.01.2: tight but operational
- 1.22.0: healthy range
- 2.02.5: comfortable, may signal modest over-investment
- Above 2.5: usually indicates excess inventory or extended AR
The most common mistake
Treating "more working capital" as automatically better. It's not. Working capital represents cash you can't deploy elsewhere. Above the optimal range, you have an opportunity-cost problem, that capital should be paying down debt, funding growth, or returning to shareholders.
Frequently Asked Questions
why can working capital be too high?
Excess working capital usually means excess inventory or extended AR, cash that could be deployed elsewhere. Ratios above 2.5 often signal operational drag.
what's not in working capital?
Long-term assets (PP&E, intangibles, goodwill) and long-term liabilities (multi-year debt).
is working capital the same as cash?
No. Cash is one component. Working capital also includes inventory, AR, and short-term liabilities.
Related Terms
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
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