Working Capital
Definition
Working capital is current assets minus current liabilities. In valuation, the relevant measure is net working capital (NWC), usually defined operationally as non-cash current assets (receivables, inventory, prepaids) minus non-debt current liabilities (payables, accrued expenses, deferred revenue) — cash and short-term debt are excluded because they are financing, not operating, items.
Changes in NWC drive cash flow: an increase in NWC (e.g., receivables and inventory build faster than payables) consumes cash, while a decrease releases cash. This is why fast-growing companies can be profitable yet cash-hungry.
Some businesses run negative working capital (e.g., subscription and grocery models that collect cash before paying suppliers), which means growth actually generates cash from working capital.
Why interviewers ask
"Walk me through how an increase in working capital affects cash flow" and "can working capital be negative — is that bad?" are staples. The trap is the sign convention: an increase in a current asset is a use of cash; an increase in a current liability is a source. Interviewers also test whether you exclude cash and short-term debt from the operating definition.
Related terms
Interviews don't test definitions — they test recall under pressure.
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