What is working capital and how do I calculate mine?

You made good sales this month, your sheet shows a profit, and yet your bank balance is nearly empty. This is not a mystery, and it is very common. The missing piece is working capital.

The simple formula

Working capital is what you have in the short term minus what you owe in the short term.

Working capital = stock + cash + money owed to you - money you owe suppliers and others soon.

Let us use clear figures. You hold stock worth Rs 50,000 at cost. You have Rs 10,000 in the bank. You owe your suppliers Rs 15,000, due in the next few weeks.

Rs 50,000 plus Rs 10,000 minus Rs 15,000 is Rs 45,000. Your working capital is Rs 45,000.

If a courier partner or payment provider owes you money for orders already delivered, add that too. If you owe a packaging vendor or have an unpaid ad bill, subtract it.

Why this number matters more than paper profit

Look at the Rs 50,000 again. It is real value, but it is sitting on a shelf. You cannot pay a supplier with it, and you cannot pay your rent with it. Only the Rs 10,000 in the bank can be spent today, and Rs 15,000 of supplier dues are waiting.

So you can be profitable on paper and short of cash in hand at the same time. Profit is what you earn over time. Cash is what you can spend now. Working capital tells you how much of your business is locked in stock and dues rather than ready cash.

A bad month, step by step

Say you buy a new batch of stock for Rs 30,000 because a festival is coming. You pay Rs 10,000 now and owe Rs 20,000 for later. Your stock rises by Rs 30,000, cash falls by Rs 10,000, and dues rise by Rs 20,000. Working capital rises by Rs 30,000 minus Rs 10,000 minus Rs 20,000 which is zero. It did not change at all, but your cash dropped and a bill is coming. If sales are slow for two weeks you will feel it.

What to do with this number

• Calculate it on the first day of every month and write it down.
• Look at the cash part separately. If the cash is less than the dues in the next 30 days, you have a gap to plan for.
• Before a big stock order, ask whether you can pay for it without touching the money you need for rent, salaries and ads.
• Watch the trend. Rising stock with flat sales means your working capital is being swallowed.

Ways to improve it

You can lift your working capital position by selling slow stock faster, asking suppliers for longer payment terms, collecting payouts sooner, and buying smaller quantities more often. Each has a cost and a trade-off, and later posts in this series look at them one by one.

If you are still planning your launch, read how much money you need to start an online store. For the true cost of each unit sitting in your cupboard, see landed cost per unit explained. And what to do in your first 30 days online helps you sequence the spending.

Know your working capital the way you know your phone battery level. It tells you how far you can go before you need to plug in.