Working capital is the money a business needs to fund day-to-day operations, calculated as current assets minus current liabilities. Too little starves the business; the right amount must transfer with it at closing.
Worked example
| Line | Amount |
|---|---|
| Current assets (AR + inventory + cash) | $180,000 |
| Less: current liabilities (AP + accruals) | −$95,000 |
| Working capital | $85,000 |
That $85,000 cushion is what lets the new owner cover payroll and supplier bills before the first customer payments land.
Why it matters when buying a business
Buyers who ignore working capital face a surprise cash call on day one. SBA lenders often let you roll a working-capital amount into the loan, and deals set a working-capital peg so the right level of net working capital transfers, trued up through an escrow after closing. Model your cash-conversion cycle before you agree the peg.
