Working capital

Working capital is the difference between current assets and current liabilities, capturing the capital tied up in the operating cycle. The composition matters more than the absolute level: receivables represent revenue not yet collected, inventory represents product not yet sold, and payables represent supplier financing. Changes in working capital flow through the cash-flow statement: an increase in receivables or inventory consumes cash, while an increase in payables produces cash. For a growing business, working capital typically grows with revenue, which is why operating cash flow lags net income during expansion phases. We watch working-capital intensity (working capital as a percentage of revenue) for two patterns. First, a steady or declining intensity is a sign of operating discipline; a steadily rising intensity is a leading indicator of slowing demand (inventory build) or aggressive revenue recognition (receivables build). Second, the cash-conversion cycle (days inventory + days receivables − days payables) is the operating-efficiency metric we track for retail, distribution, and consumer businesses.