Working Capital
Definition
Working capital is the cash a business has tied up in day-to-day operations, calculated as current assets minus current liabilities. In supply chain terms, it is dominated by inventory, receivables, and payables.
In Practice
Every unit of inventory on a shelf is cash the company cannot use elsewhere: it was paid to suppliers, converted into product, and will not return as cash until sold and collected. Supply chain decisions, such as batch sizes, safety stock levels, lead times, and network structure, therefore directly set a large share of the company's working capital requirement.
Planners feel this most at quarter-end, when finance pushes to reduce inventory for the balance sheet. Sustainable reduction comes from structural changes, like cutting lead times or improving forecast accuracy, rather than one-off order freezes that cause stockouts in the following quarter. The carrying cost of inventory, typically 15 to 30 percent of its value per year, is the ongoing price of working capital tied up in stock.
A distributor holding 60 days of inventory on 100 million dollars of annual cost of goods has roughly 16 million dollars locked up; trimming ten days frees nearly 3 million in cash.
Related Calculators
Related Terms
The cash-to-cash cycle measures the days between paying suppliers for materials and collecting cash from customers for the finished product. It equals days of inventory plus days of receivables minus days of payables.
Supply Chain ManagementSupply chain management (SCM) is the coordination of all activities involved in sourcing, making, and delivering a product, from raw materials to the end customer. It aims to meet customer demand at the lowest total cost across the entire network.
Key Performance Indicator (KPI)A key performance indicator is a quantifiable measure used to track how well a supply chain meets its objectives, such as fill rate, forecast accuracy, inventory turnover, or on-time delivery.