Working capital
Working capital is the money tied up in day-to-day operations, calculated as current assets minus current liabilities - mainly inventory plus money owed to you, minus money you owe suppliers and short-term debts. Ecommerce operators use it to see how much cash the business needs just to keep running, before any profit is available to reinvest.
| Term | What it covers |
|---|---|
| Current assets | Cash, inventory and money owed to you (card, marketplace and wholesale payouts) that should turn to cash within a year. |
| Current liabilities | Money owed to suppliers, plus short-term loans, taxes and accruals due within a year. |
| Working capital | The difference. Positive means near-term assets cover near-term obligations; negative can mean a squeeze - or an efficient supplier-financed model. |
The version operators watch, net working capital, often strips out cash and debt to focus on inventory + receivables − payables - the operating cash tied up in trading.
Worked example
Example numbers. A$400,000 of it sits in inventory, so growth means buying the next batch before the cash from the last one has arrived.
What is a good working capital?
There is no universal target, and a bigger number is not automatically better. Positive working capital looks safe, but a large positive figure often means cash is trapped in slow-moving stock and overdue payouts - money you own but cannot spend. Some of the most efficient retailers deliberately run near-zero or even negative working capital, because suppliers and fast customer payments effectively fund their inventory. What actually matters is the cash conversion cycle behind the number - how quickly working capital turns back into cash - and whether you can fund your growth rate without running dry. Read working capital against your model, margin and supplier terms, never against a benchmark.
Working capital vs related metrics
| Metric | What it measures | How it differs from working capital |
|---|---|---|
| Cash conversion cycle | Days between paying for stock and getting paid. | The time version of working capital - how long the cash stays tied up, not how many dollars. |
| Inventory turnover | How many times stock sells and is replaced per year. | Drives the largest slice of working capital; faster turnover frees the cash locked in inventory. |
| Days of cover | How long current stock will last at recent demand. | Sets how much inventory - and therefore cash - you choose to hold. |
| Contribution margin | Profit left per order after variable costs. | The profit each order makes; working capital is the cash you must float to generate those orders. |
Common mistakes
- Confusing working capital with profit. You can be profitable on paper and still run out of working capital as inventory and receivables grow faster than cash comes in.
- Ignoring payout timing. Marketplace, card and BNPL settlements lag the sale, so receivables tie up more cash than a "we get paid at checkout" assumption suggests.
- Counting dead stock as a healthy asset. Dead stock inflates current assets while being trapped cash you may never recover at full value.
- Forgetting growth is hungry. Faster growth consumes working capital faster than it produces it, which is why growing stores can be cash-poor.
- Watching the static balance. A single snapshot hides the cash conversion cycle that actually explains why the money is stuck.
Working capital FAQ
Related
Blufire S11 Planning & Forecasting builds the cash and inventory forecast that shows how much working capital your growth will tie up, against the inventory, receivable and payable balances reconciled to the dollar on The Math.
Updated July 2026