Working Capital Overview: What You Need to Know 

working capital optimization

Working capital plays a pivotal role in the financial health and operational efficiency of any organization. One of the key benefits is its ability to ensure the smooth day-to-day operations of a company. Optimizing working capital allows a business to meet its short-term obligations, such as paying suppliers and covering overhead costs, without disruptions. Additionally, it enables a company to take advantage of growth opportunities, whether that involves expanding operations, investing in new equipment, or hiring more staff.  

A healthy working capital position can enhance a company’s creditworthiness and reputation, making it easier to secure financing at favorable terms. Working capital is a vital financial metric that underpins a business’s sustainability, growth, and resilience in the face of economic fluctuations. Here, we’ll explore the types and key drivers of working capital, a checklist to ensure adequate working capital, and next steps you can take. 

What is Working Capital? 

Working capital, also known as Net Working Capital (NWC) is a financial metric that represents the capital available for a company’s day-to-day operational activities. Working capital can be calculated by finding the difference between a company’s current assets (such as cash, accounts receivable/customer’s unpaid bills, investments, and inventories of raw materials and finished goods) – and its current liabilities, (such as accounts payable and debts).  

Working capital reflects a company’s ability to meet its short-term financial obligations and fund its ongoing operations. Positive working capital indicates that a company has more current assets than current liabilities, while negative working capital suggests the opposite, which may signal financial difficulties. Maintaining an adequate level of working capital is crucial for businesses to ensure the smooth flow of operations, meet financial commitments, and seize growth opportunities. 

Types of Working Capital  

It’s important to note the key types or working capital to better understand how to leverage working capital effectively:   

  • Gross Working Capital – The current assets of the company’s balance sheet represent the Gross Working Capital of the company 
  • Net Working Capital – Net Working Capital is also referred to simply as working capital. It’s calculated as current assets minus the current liabilities 
  • Permanent/Fixed Working Capital – The level below which the Net Working Capital has never gone. It is further divided into Regular Working Capital and Reverse Working Capital 
  • Temporary/Variable Working Capital – Temporary/Variable Working Capital is calculated as Net Working Capital minus Permanent Working Capital. This is further divided into Seasonal Working Capital and Special Working Capital 

Understanding these different types of working capital is worthwhile for businesses and treasurers alike because it provides a nuanced perspective on a company’s financial health and operational requirements. By recognizing gross working capital as the core funding for daily operations and separating it from permanent and temporary working capital, companies can better plan for long-term growth and manage seasonal fluctuations. This knowledge is invaluable for making informed financial decisions, optimizing cash flow, and ensuring a business’s ability to meet short-term and long-term objectives. Comprehending the various dimensions of working capital enables more effective financial management, helping companies navigate the complexities of their financial landscape and adapt to changing market conditions. 

A Working Capital Checklist  

When it comes to leveraging working capital efficiently and effectively, KPMG developed the following checklist which can offer suggestions for the elements an organization’s working capital engine should consist of.  

Cash Management 

  • Ensure clear visibility of cash across all bank accounts – utilizing a TMS can be useful in this regard 
  • Have a good understanding on how quickly cash can be accessed and utilized in the organization 
  • Know if there is any “trapped” cash and what the options are to release this cash for use 
  • Consider the impact cashflows have on hedging 

Working Capital 

  • Determine potential suppliers for short-term sourcing and payment terms 
  • Consider the frequency of payment runs 
  • Look at what can be done to accelerate receipts 
  • Revise inventory management strategy if it pertains to your organization 
  • Consider slow moving obsolete stock if this pertains to your organization 

Liquidity Planning  

  • Determine the extent and timing of cash shortfalls so that you can plan for additional funding if necessary  
  • Identify sources of risk and the impact these risks will have on your organization  
  • Perform cashflow forecast for the short term; short term being define as a month  
  • Conduct actual vs. forecast analysis daily and or even weekly to get an understanding of the variances  
  • Conduct scenario analysis of short-term & long-term forecasting  
  • Prepare contingency plans  
  • Promote a culture within the organization to ensure a common cash goal by regular dialogue with stakeholders 

Credit Availability 

  • Know what credit facilities are available for use and identify between committed and uncommitted facilities 
  • Keep an open dialogue with financiers to ensure a continued commitment to provide sufficient credit 
  • Clarify the drawdown notice period for any revolving credit facilities and meet those deadlines to avoid penalties 
  • Continue to communicate with finance providers your concerns about servicing current debt obligations 
  • Seek independent professional advice if necessary 

Other Considerations 

  • Alternate funding solutions, i.e. Supply chain financing, purchasing cars, and sale leasebacks 
  • Pay particular attention to current debt covenants; you do not want to default on a loan as it can be costly  
  • Look into government support that is available to your organization 
  • Have security in place for cyber-attacks as they can result in a loss of cash 

Drivers of Working Capital  

Working Capital becomes increasingly important in times of uncertainty. By bolstering liquidity and improving your ability to respond to future shocks, you’re in a position to be able to weather the storm of changes that may come to your organization. Following the recent economic jolts of COVID-19 to supply chain issues, rising inflation, gas price increases due to the war in Ukraine, etc., the focus on cash has become even more critical. Organizations are facing pressure to do more with less, and optimizing an organizations’ working capital is a critical step in protecting  

What is the Working Capital Cycle? 

The Working Capital Cycle is the amount of time it takes for a business to pay off their liabilities, such as supplier invoices, and then begin collecting all cash it receives from sales and profit within an operating cycle. There can be certain risks of having an improper working capital structure. Liquidity problems and cash shortages are something to look out for. Not having enough cash to meet short-term obligations such as paying suppliers, employees, taxes, or even interest on debt is something to be aware of.  

Operational disruptions or strained supplier relationships can mean inventory or raw materials are not readily on hand and could cause supply chain issues. Suppliers may charge higher prices, impose stricter terms, or withhold deliveries if they are not paid on time.  


With a healthy working capital engine, you and your organization should be able to identify working capital, keep an eye on negative working capital, and find instances and strategies where you can maximize your available working capital. Communicating continually with the necessary departments within your organization about all financial needs and how they play a major role in retaining the appropriate amount of working capital is imperative. High working capital isn’t always a good thing either. It might indicate that the business has too much inventory, not investing its excess cash, or is not capitalizing on low-expense debt opportunities.  

Optimizing working capital for your organization can be a daunting yet worthwhile undertaking. No matter the stage of your treasury department’s working capital capabilities, Elire’s team of treasury experts is here to assist and advise you. View the webinar recording of “Working Capital: What It Means For Your Organization” from the 2023 Elire Treasury experience. This session is password-protected but can be accessed by reaching out to [email protected]. In the meantime, reach out to our treasury team at [email protected] to discuss your working capital goals and options.  


  • Maddie Caron

    Ms. Caron serves as Elire's Marketing Specialist, specializing in content writing and digital media communications. Maddie works to deliver relevant industry updates and technical blog posts to educate and engage Elire's audience.

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