Working Capital: Profitability is not Everything.

Be careful of accounting definitions

  • The accounting definition of working capital = current assets – current liabilities.
  • On the surface this has very little meaning.
  • Current assets & liabilities could contain items that is not related to operations.
  • Know your numbers so you know your business

Working capital: Internal Vs External

  • Working capital is used to evaluate the efficiency of cash management in meeting the demands of the direct cost of goods/ services.
  • The more certain we are, the less working capital we need.
  • The more uncertain the more you need on hand
  • If you half operating cycle, you half working capital need


  • The whole point of WC management is to determine whether the company has enough cash to pay off short term operating liabilities as they come due.
  • Bad working capital management further reduces profitability due to limited cash for further investment
  • The goal is optimization and not maximization

Download the excel template in the video here: Profitability Vs Liquidity.xlsx