Working Capital

Working capital provides a snapshot of short-term financial health. Current assets include cash, accounts receivable, and prepaid expenses. Current liabilities include accounts payable, accrued expenses, and the current portion of any debt. The gap between them reveals whether the business has enough liquid resources to operate smoothly.

For startups, working capital is closely tied to cash management. A company with significant accounts receivable but low cash may have positive working capital on paper while struggling to make payroll. This is why analyzing the composition of working capital matters as much as the total figure.

The working capital ratio (current assets ÷ current liabilities) provides a normalized view. A ratio of 1.5 to 2.0 is generally considered healthy. Below 1.0 means liabilities exceed assets in the short term, which is concerning unless the company has reliable incoming funding. SaaS companies with prepaid annual subscriptions often enjoy strong working capital because customers pay before service is fully delivered.