What is Working Capital?
Working capital is the difference between a company’s current assets and current liabilities. It measures short-term liquidity, the funds available to finance day-to-day operations such as paying suppliers, settling payroll, and holding inventory. Positive working capital signals the ability to cover near-term obligations; negative working capital may signal liquidity stress (or, in some industries, an efficient cash conversion model).
How It Works
- Sum current assets: cash, receivables, inventory, and prepaid items.
- Sum current liabilities: payables, short-term debt, accrued expenses, and VAT payable.
- Working Capital = Current Assets – Current Liabilities.
- Cash Conversion Cycle = Days Inventory + Days Receivables – Days Payables.
- Optimize by tightening collections, extending payables, and reducing stock days.
Saudi Context
Saudi distributors and contractors often face long receivable cycles from large government and corporate customers. Kafalah (the SME guarantee program) and SME-focused factoring offered by Saudi banks help finance working capital gaps. ZATCA’s e-invoicing speeds up VAT recovery, reducing cash tied up in input VAT.
Example
A trading company has current assets of SAR 1,200,000 and current liabilities of SAR 800,000. Working capital = 1,200,000 – 800,000 = SAR 400,000, which it uses to fund 60 days of receivables and 45 days of inventory before suppliers must be paid.