What Is Working Capital? The Cash a Business Runs On
Working capital is the cash a business needs to keep running day to day. Learn what it measures and how to use it in a case interview.
Working capital is the cash a business needs sitting around just to keep the lights on between the day it pays for things and the day customers pay it back. It is the difference between a company that looks profitable on paper and one that can actually make payroll on Friday.
Most candidates can recite the formula but freeze when an interviewer asks why a fast-growing, profitable company ran out of money. This guide fixes that. By the end you will understand what working capital really measures, why growth can drain it, and how to use it to spot a cash crunch in a case.
Profit is an opinion recorded over a year. Cash is a fact you need every single week.
What Working Capital Actually Measures
Picture a kitchen that caters weddings. Before the event, the chef buys all the ingredients with their own money. The food gets cooked and served on Saturday, but the client does not pay the invoice until thirty days later. For that whole month, the chef has spent cash and received nothing back.
Working capital is the pile of cash that bridges that gap. It is the money tied up in ingredients already bought and in invoices not yet collected, minus the money the chef still owes to their own suppliers. The chef needs enough of this cushion to cover every gap between paying out and getting paid back, or the next wedding cannot happen.
Formally, working capital equals current assets minus current liabilities. Current assets are inventory plus money customers owe you. Current liabilities are money you owe suppliers and other short-term bills. The bigger the gap between what is tied up and what you can delay paying, the more cash the business must hold to survive.
Why Growth Can Drain the Tank
Here is the part that surprises candidates. Growing fast can starve a profitable business of cash.
Go back to the caterer. If weddings double, the chef must buy twice the ingredients up front, and twice as many clients now owe money that has not arrived yet. The cash needed to bridge the gap doubles too, even though every event is profitable. Growth pulls more and more cash into inventory and unpaid invoices before any of it comes back.
This is the working capital trap. The faster the business grows, the more cash it swallows just to operate, and a profitable company can run dry chasing its own success. Consultants watch this constantly, because the income statement says everything is fine while the bank account quietly empties.
How Consultants Use Working Capital in a Case
In a case, working capital is your tool for the question that separates good candidates from great ones: "is this company about to run out of cash?"
The lever to pull is the cash conversion cycle: how long cash stays trapped between buying inventory and collecting from customers. Shorten it and you free up cash without earning a single extra dollar of profit. Collect invoices faster, hold less inventory, or stretch supplier payments, and the trapped cash comes loose. This is often the fastest fix in a turnaround.
Peloton's 2022 collapse is a textbook cash crunch. The company built inventory for demand that disappeared, leaving warehouses full of bikes that tied up cash while sales slowed to a trickle. Practice this framework on a real case → Peloton 2022: The $50 Billion Demand Mirage on BoardroomIQ puts you in the room.
Practice this framework
Work through the Peloton 2022: The $50 Billion Demand Mirage case with AI coaching.
Where Working Capital Misleads You
A single working capital number tells you almost nothing without context, and interviewers test whether you know that.
More working capital is not automatically good. A mountain of inventory and uncollected invoices means a lot of cash is trapped and doing nothing. Some of the strongest businesses run on negative working capital: a grocer collects cash instantly at the register but pays suppliers weeks later, so customers effectively fund the business. Low or negative working capital can be a sign of power, not weakness.
The direction matters more than the level. A sudden jump in working capital can mean inventory is piling up unsold or customers have stopped paying. When you see working capital climbing, your first question should be "which piece is growing, and is that a warning?"
How to Practice Working Capital Before Your Interviews
Trace the cash through a business. Pick a company and walk through the cash cycle out loud: it pays for inventory, holds it, sells it, then waits to collect. Estimate how many days cash stays trapped at each stage. This builds the intuition for where money hides.
Model a growth squeeze. Take a profitable business and double its sales on paper. Work through how much extra cash the bigger inventory and unpaid invoices demand. Watch how profit and cash pull in opposite directions.
Hunt for negative working capital. Find two businesses, one that collects before it pays and one that pays before it collects. Explain why the first can grow on customer cash while the second needs a war chest. This contrast sharpens the whole concept.
The best way to practice working capital is under realistic pressure, with a case that fights back.