---
title: What Is Working Capital & Why It Matters | Live Oak Bank
description: Working capital covers payroll, inventory, taxes, and more. Learn what it is and how a flexible Live Oak Express loan can keep your business moving forward.
image: https://www.liveoak.bank/hubfs/working-capital-101-what-is-it-and-what-is-it-used-for-live-oak-blog-post.jpg
---

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# Working Capital 101: What is it and What is it Used For?

 Written by Live Oak Bank

![working capital 101](https://www.liveoak.bank/hubfs/working-capital-101-what-is-it-and-what-is-it-used-for-live-oak-blog-post.jpg)

 With Live Oak, you get a partner who believes in your success, and is willing to take the journey alongside you. We provide small business loans tailored to your goals.

[See if a Live Oak® Express loan fits your working capital needs](https://www.liveoak.bank/business-loans/live-oak-express/?RefId=blog)

Running a small business? You'll likely hear a lot about "working capital." While it might sound vague, understanding this concept is essential to your business. Working capital is key to keeping your business running smoothly and being profitable.

## What is working capital?

Quick definition:

- Working capital is the money your business has available to fund day-to-day operations and pay short-term bills.
- Calculate your business’s working capital by subtracting current liabilities from current assets.
- Working capital can be used to cover everyday business expenses like payroll, inventory purchases and vendor payments, helping keep operations running smoothly.

To understand how to use it, where to get it, and what to do with it, [working capital](https://www.liveoak.bank/blog/why-a-working-capital-loan-beats-credit-card-debt) must first be defined. Essentially it is the cash a business has on hand to meet their short-term liabilities. Working capital allows the business to make important purchases and meet obligations like payroll, inventory and emergency expenses. Effectively managing working capital is crucial for a business's day-to-day operations and long-term financial health.

Two key metrics help business owners measure and monitor working capital: net working capital and the working capital ratio.

**Net working capital** is calculated by subtracting current liabilities from current assets (Net Working Capital = Current Assets − Current Liabilities). This figure shows, in dollar terms, how much cash a business would have left over if it paid off all its short-term obligations today. A positive number means the business has a cushion to cover near-term expenses; a negative number signals the business may struggle to meet its obligations without additional financing.

**The net working capital ratio**, also known as the current ratio, is calculated by dividing current assets by current liabilities (Net Working Capital Ratio = Current Assets ÷ Current Liabilities). Rather than a dollar amount, this gives a proportional view of liquidity. A ratio above 1.0 generally indicates a business can cover its short-term liabilities with its short-term assets, while a ratio below 1.0 may be a warning sign of cash flow trouble ahead. 

Together, these two metrics give a fuller picture than either one alone, net working capital shows the actual dollar buffer, while the working capital ratio shows how that buffer scales relative to obligations.

Maintaining sufficient working capital facilitates smooth operations and helps foster growth. It allows businesses to go after opportunity, invest in innovation, and prepare for market fluctuations. Proper working capital directly impacts a company’s ability to cover necessary expenses to keep their business running.

 

## Why would your business need it?

As stated above, businesses may need working capital to cover their short-term liabilities and to maintain financial health. Here are some practical examples: 

- Accounts payable – These could be charges that need to be paid typically within a year or less. This could include vendor payments, transportation expenses, paying for a building lease and more. These could be classified as operational costs that keep businesses running smoothly.
- Taxes – [Taxes](https://www.liveoak.bank/blog/paying-small-business-estimated-quarterly-taxes) are not an exciting expense, but they are a crucial element to staying up to date with and to ensure the company is acting in accordance with the government. Working capital may help a business pay their taxes by the due date in a pinch.
- Buy inventory – A company that sells products needs inventory to sell to consumers. Working capital allows these businesses to buy needed inventory to meet customer demands.
- Payroll – A talented and efficient workforce is an essential part of almost any business, and of course, no employee wants to work for free. Meeting payroll deadlines is an important way to build trust and retain great employees, and if needed, working capital can go towards fulfilling this obligation.
- HR expenses – Human Resources covers vital tasks such as benefits and compensation, training and development, recruiting and [hiring](https://www.liveoak.bank/blog/hiring-and-retention-tips-for-small-business-leaders) and more. Working capital may be used to help pay for HR software subscriptions and tools.
- Marketing expenses – Brand awareness is vital for any business success – customers need to know your brand exists. [Marketing](https://info.liveoak.bank/guide-small-business-marketing?RefId=blog) is often the key to achieving this, but it can cost money. Working capital can help cover those expenses, from running ad campaigns and social media promotion to valuable sponsorships.
- Emergency funds – Unforeseen emergencies can occur at any time. Having an emergency fund acts as a buffer for unplanned expenses such as natural disasters, break-ins or hacking, legal problems, or damage to a building or office like air conditioning or plumbing. 

 

## How working capital can support your goals

According to the [Intuit Small Business Annual Report](https://digitalasset.intuit.com/render/content/dam/intuit/sbseg/en_us/Blog/Downloadable-assset/Ebook/intuit-quickbooks-small-business-index-annual-report-2023.pdf?cid=dig_TOF_QBB_blog_US_EN_SMBIndex_AR_hub_PDF), over half of small business owners rely on personal funds to get by. In fact, 58% dip into their savings accounts to cover business needs. Mixing personal and business finances can be risky. Additionally, some small business owners leverage credit cards to bridge their financial gaps. This may appear to be an easy and quick solution; however, the extremely high fees and interest rates associated with this choice end up costing the business owner more money.

For some businesses, a working capital loan may be the wisest choice. These loans are built for flexibility. They can cover the same expenses we mentioned, and more. They're typically smaller than traditional loans and designed for a faster application process, getting you the funds you need quickly.

This type of loan offers strategic financial support, enabling your business to manage cash flow productively, invest in expansion initiatives, and prepare for unexpected challenges.

With a [Live Oak ® Express loan](https://www.liveoak.bank/business-loans/live-oak-express/?RefId=blog), small business owners can unlock working capital to fuel growth. These term loans are designed specifically for small business owners who need access to funds fast. Loan amounts range from $10,000-$350,000 with terms up to 10 years.

 

## Industries that rely on working capital

Working capital needs can vary widely from one industry to another. Whether it's purchasing inventory, managing payroll, covering seasonal fluctuations or funding project expenses, working capital helps businesses maintain smooth operations and stay prepared for growth opportunities.

- **Electrical contractors**: Materials often need to be purchased and crews paid before a project is completed. Access to working capital can help bridge the gap until customer payments are received.
- **Real estate companies**: Transactions can take weeks or months to close, creating uneven cash flow. Working capital helps cover operating expenses while revenue is still pending.
- **Construction companies**: Project costs typically occur long before final payments are collected. Having working capital available helps keep projects moving without disrupting cash flow.
- **Retail businesses**: Inventory often needs to be purchased well before it is sold. Working capital provides flexibility to stock products and manage day-to-day expenses.
- **Professional service firms**: Client invoices may not be paid immediately after work is completed. Working capital helps cover payroll and other operating costs while waiting for payment.

 

## Working Capital Frequently Asked Questions

 

### Does working capital include cash?

Cash is typically one of the most important components of working capital because it is a current asset that can be used immediately to cover short-term obligations. Working capital also includes other current assets, such as accounts receivable and inventory, offset by current liabilities.

### What is working capital used for?

Working capital is used to fund day-to-day business operations and cover short-term expenses. Common uses include paying employees, purchasing inventory, covering vendor invoices, managing seasonal fluctuations and maintaining a financial cushion for unexpected costs.

 

 **Tags:** [Finance My Business](https://www.liveoak.bank/blog/tag/finance-my-business)

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