Running a small business is as much about managing cash flow as it is about growing sales. At the heart of that is working capital management — a term that may sound technical but is essential to daily operations and long-term survival. In simple terms, working capital is the money available to run your business day to day. This post will break down what working capital is, why it matters, and how small businesses can manage it effectively to avoid cash shortages or unnecessary stress.

“A small business is only as strong as its cash position.” 

What Is Working Capital?

Working capital is the difference between your current assets and current liabilities:

Working Capital = Current Assets – Current Liabilities

Where:

• Current assets include cash, accounts receivable, inventory
• Current liabilities include accounts payable, short-term debts, wages

Positive working capital means your business can easily cover its short-term obligations. Negative working capital is a red flag that bills may go unpaid.

Why Working Capital Management Matters

For small businesses, strong working capital management ensures:

• Timely payments to suppliers and employees
• Ability to handle unexpected expenses
• Smooth day-to-day operations without relying on credit lines

For example, a small café with too much inventory tied up in unsold products and slow-paying customers might technically be profitable — but still run out of cash.

Key Components of Working Capital Management

1. Cash Management

• Ensure enough liquidity to cover daily needs
• Avoid holding excessive idle cash

Example: A retailer maintains one month’s expenses in reserve while investing any excess in short-term savings or reinvestments.

2. Accounts Receivable (AR) Management

• Set clear payment terms
• Invoice promptly
• Follow up on overdue accounts

Example: A service business enforces Net 15 payment terms and follows up after 7 days late, improving cash inflow consistency.

3. Inventory Management

• Avoid overstocking slow-moving products
• Use just-in-time (JIT) systems where possible

Example: A landscaping supply store reviews stock weekly to adjust orders based on demand trends.

4. Accounts Payable (AP) Management

• Negotiate favorable payment terms
• Pay bills on time to avoid fees — but not earlier than necessary

Example: A painting business aligns supplier payments with customer payment cycles to keep cash flow stable.

5. Short-Term Financing

• Maintain access to lines of credit or short-term loans for buffer
• Avoid using long-term financing for short-term needs

Example: A small manufacturer uses a revolving credit line to manage seasonal slowdowns.

How to Calculate Your Working Capital

To calculate your working capital:

Working Capital = (Cash + Accounts Receivable + Inventory) – (Accounts Payable + Short-Term Loans + Accrued Expenses)

Aim for positive working capital, but avoid having too much tied up in slow-moving assets like excess inventory.

Common Working Capital Mistakes

• Overextending credit to customers
• Holding too much inventory
• Paying bills too early without considering cash flow
• Neglecting regular reviews of working capital position

The Bottom-Line

Understanding and managing working capital isn’t just about balance sheet numbers. It’s about ensuring your small business has the cash it needs to operate confidently, meet obligations, and invest in future growth. When working capital management is done right, your business becomes more resilient and agile — ready to handle both opportunities and challenges.

We Can Help. Let’s Chat.

Need help reviewing or optimizing your business’s working capital? Jogi Business Solutions specializes in helping small businesses think bigger and manage smarter. Connect with us to get started.