What is working capital?

Consider your personal finances.

Each month you go to work and ‘sell’ your time to your employer.

At the end of each month they pay you cash for your work.

You use that cash to pay your bills for that month.

And then next month the cycle is completed. You get paid, you pay your bills. And so on.

But imagine you had to work for 3 months before you got paid.

So the work you did in January, you didn’t get paid until April.

But your bills still need to be paid in January, February and March

So how do you do it?

Well you’ll need to start with some cash to pay the bills in January, February and March.

In essence that’s what’s called working capital in a business.

 

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