Dr. Paul Borosky, DBA, MBA
Business Consultant & Author
Guide 6 of 11 · Manage Cash
What Is Working Capital? A Small Business Guide
Somebody is financing somebody. Make sure it is not always you.
Customers owe you. You owe suppliers. Some businesses hold inventory on a shelf. How fast money moves through that chain decides how much cash it takes to run the business, no matter how profitable it is. A growing business can get poorer every month without losing a dime.
Last Updated: 10/27/2026 · Written by Dr. Paul Borosky, DBA, MBA
The Short Answer
What Is Working Capital?
Textbook Definition
Working capital, or net working capital, is current assets minus current liabilities. It measures the short-term resources a business has left after covering obligations due within one year.
In Plain English
What you will collect and hold over the next year, minus what you will owe over the next year. When customers pay slower, it goes up, but the money is stuck in invoices, not in the bank.
Working Capital
Current Assets − Current Liabilities
Ridgeline, end of Year 2: $14,000
What One Day Is Worth
Yearly Revenue ÷ 365
Ridgeline, Year 3: about $1,860
Public companies track the same number. Apple runs with negative working capital because its cash flow is enormous. A small business does not have that luxury.
Show the Math
What Getting Paid Faster Is Worth to Ridgeline
Year 3 revenue: $680,000, or about $1,860 a day. Days to get paid: about 32 overall. Harbor Point, the biggest customer, is running about 55 against 45-day terms.
| Change | Cash freed up |
|---|---|
| Everyone pays 1 day faster | about $1,860 |
| Everyone pays 4 days faster (32 to 28) | about $7,450 |
| Harbor Point goes from 55 days to 45 | about $6,400 |
| Harbor Point goes from 55 days to 38 | about $10,800 |
Ridgeline Landscaping, fictional, from the book.
The Method
How to Free Up Working Capital
Invoice the day the work is done.
Every day you wait to bill is a day added to the end.
Make it easy to pay.
Put a payment link on every invoice. Make the bank transfer the easy, free option, because card fees add up.
Run a collections ladder.
Reminder at 7 days past due. Second reminder and a phone call at 21. Hold new work at 60. Formal letter at 90.
Learn your biggest customer’s process.
Purchase order numbers, approval steps, check-run dates. Most late invoices are stuck, not refused.
Use supplier terms, and take real discounts.
Pay net 30 on day 30, not day 3. A 2% discount for paying in 10 days instead of 30 works out to about a 37% yearly return.
Never Pay Suppliers Late
It is tempting to stretch suppliers to cover slow customers. Do not. A supplier can stop delivering, and then you cannot do the work that brings the money in. Fix the receivables side first.
Two Owners, Same Town
Mike Ran the Ladder. Dale Sent One Invoice.
Harbor Point paid both late invoices the week after Mike walked in, and the next one came in on day 38. His credit line went from $15,000 to $5,000.
Dale landscaped new houses for a home builder that stopped paying in March. Dale kept working through April and May. By September, the builder owed him $12,000, all of it past 120 days, because nobody told him to stop. Inventory businesses face the same math on the shelf: every extra day of stock is cash already spent and not yet back.
Owner Warning
What Ties Up a Small Business’s Working Capital?
- Waiting until the end of the month to invoice.
- Never sending a second reminder.
- Invoices stuck for a missing purchase order number.
- Paying a net 30 bill on day 3.
- Paying suppliers late to cover slow customers.
- Too many days of inventory sitting on the shelf.
From the Book
You Are Their Bank
Chapter 14 · Receivables, Payables, and Inventory
Dr. Paul’s Bottom Line
Every day a customer takes to pay, you’re their bank. Charge like one, or stop being one.
Receivables, payables, inventory, and the cash they hold hostage. It is all in the book.
Get the Book on Amazon →Cash Stuck in Invoices?
Dr. Paul works with owners as a part-time financial lead, setting up the ladder and watching days to get paid every month. See fractional CFO services. For the 90-minute version, see Cash Flow Management for Small Businesses.
Beyond the Book
From Reading Statements to Building a Business
Same skills, real stakes. Pick the level of help that fits where you are.
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Fill in the blanks. Plan, projections, and statements set up for your type of business.
See the Templates →Business Plan Writing
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See Plan Writing →Business Consulting
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See Consulting Options →FAQ
Working Capital Questions
What is working capital in simple terms?
Why can working capital go up while cash goes down?
How do I calculate what a day of receivables is worth?
Should I take early-payment discounts from suppliers?
Keep Going
Related Guides
Working capital connects to pricing, cash flow, and growth. These guides cover each one.
Written by Dr. Paul Borosky, DBA, MBA, business consultant, author, and adjunct finance instructor with an MBA focused in finance.
This page is for general educational purposes only. It is not legal, financial, tax, accounting, or lending advice. Tax rules change by place and by year. Ridgeline Landscaping and its figures are a fictional illustration from the book, not a projection for your business. For decisions about your own business, consult a qualified professional.