Working Capital Guide

What is working capital?

Working capital is the cash a business needs to keep operating while it waits for its own money to arrive. It pays staff on Friday even though the big customer pays in forty-five days; it buys the inventory in March that sells in June; it covers the supplier who wants payment in ten days while the invoice is still aging.

Every business with a delay between spending and collecting has a working capital cycle. The cycle is not a problem to eliminate — it is a feature of doing business. The question is whether the business has the capital to cross it comfortably.

Why do healthy businesses run short of working capital?

Because the same forces that create revenue also create the gap. Growth means hiring and buying ahead of collecting. Busy seasons mean stocking up before sales arrive. Big contracts mean mobilizing before payment. A business can be busier and more profitable than ever — and shorter of cash than ever — at the same time.

Illustrative scenario: a Vancouver distribution business lands a large recurring account. Revenue will rise — but so will inventory purchases, and the new customer pays in sixty days. The gap the business crosses every month just got wider. That is a working capital story, and it is a good-news story handled correctly.

• Receivables — customers paying in 30, 45, 60+ days
• Inventory — stock bought ahead of sales
• Payroll — staff paid before clients pay
• Supplier terms — outlays that precede collections
• Seasonality — revenue concentrated in part of the year
• Growth — new costs landing before new revenue

How is working capital financing different from equipment financing?

Equipment financing is built around a specific asset — the machine, vehicle or system being acquired, which often stands behind the structure. Working capital financing is built around the operating rhythm — revenue and its timing. A business with steady monthly revenue and a repeating gap is presenting a different picture, and a different structure, than a business buying a $120,000 press.

How is working capital financing different from a line of credit?

Conceptually they overlap — both provide flexible capital for operating needs. A line of credit is a specific revolving structure: a standing amount you draw and repay. Working capital financing is a broader category that can include revolving arrangements, term-based working capital structures, or revenue-based structures. Which one fits depends on how predictable the gap is: a recurring, similar-sized gap suits a revolving structure; a larger one-time widening of the gap may suit a term structure.

How do receivables fit into working capital?

Receivables are often the gap itself. When the working capital problem is specifically that customers owe money that will arrive later, receivables-based structures — financing against eligible invoices, or selling them through factoring — directly convert the waiting into capital. For B2B businesses with strong customers and slow payment terms, these structures can be the most direct answer to the cycle.

How much working capital does a business need?

Enough to cross the widest recurring gap with room for surprises — not the maximum available. A useful exercise is mapping the next six months: when money reliably leaves, when it reliably arrives, and where the lowest point lands. That lowest point, plus a buffer, is the working capital target. Sizing capital to the actual rhythm is covered in How Much Business Financing Do I Need?