Healthy working capital: the simple formula few companies use.

Most companies that went bankrupt during accelerated growth share one thing: they were profitable on the income statement until they broke. It wasn't loss that killed them — it was lack of working capital.

The concept isn't complex. The basic formula fits in one line. Even so, we find this topic under-monitored in four out of five SMEs we diagnose. Worth the time to understand well.

What working capital is, in one sentence

Working capital is the money your company needs to have available to run day-to-day operations after honoring all short-term commitments.

In formula:

Net Working Capital = Current Assets − Current Liabilities

Current assets = cash + receivables + inventory + short-term investments. Current liabilities = suppliers + taxes payable + salaries + loans maturing within 12 months.

If positive, the company has slack. If negative, it's in risk zone.

Why so many companies ignore this number

Working capital stays hidden between the income statement (which shows if there's profit) and cash flow (which shows money coming in and out). It doesn't appear highlighted in either — requires calculation from the balance sheet.

Since balance sheet is often closed only for quarterly accounting, the number stays outdated. By the time the problem appears, it's already critical.

The consequence: most SMEs discover they have strangled working capital when the bank refuses loan renewal, supplier requires cash payment, or payroll locks.

The relationship between growth and working capital

Here's the paradox that kills companies: the more the company grows, the more working capital it needs.

Imagine a company that sells at 60 days and pays suppliers at 30. Each new R$ 100k sale requires financing R$ 50k in working capital during that mismatch period. If sales double in 12 months, working capital need also doubles — even with stable profit.

That's why many fast-growing companies need to raise debt or equity even while generating profit. Cash gets stuck in the production chain.

Growth can break a company. The symptom is tight cash amid growing sales. The diagnosis is always working capital.

The three signs of working capital problem

1. Cash conversion cycle lengthening

Cash conversion cycle = average inventory days + average receivable days − average payable days. It's how many days money stays trapped in the business between purchasing raw material/producing/selling/receiving, discounting credit suppliers give you.

If cycle is increasing month over month, there's signal of problem — clients paying slower, inventory accumulating, or suppliers tightening terms. Each additional cycle day means more working capital needed.

2. Growing need for short-term loans

Healthy company uses loans to invest in assets (machine, expansion), not to close payroll. When short-term credit (working capital bank loan, receivable advance, overdraft) appears recurrently to cover operations, it's diagnosis of insufficient working capital.

3. Delays in supplier payments

When systematic delays start appearing with suppliers — even with positive profit — it's clear sign. Company is using supplier commercial credit as working capital, which is unsustainable.

Expanded formula — net vs operational working capital

There's a more useful version of the basic formula:

Working Capital Need (WCN) = (Receivables + Inventory) − (Suppliers + Salaries payable + Taxes payable)

This measure shows how much capital operations are actually consuming. If WCN is greater than net working capital, the company needs to cover the difference with own cash or financing — and there's signal of stress.

How to optimize working capital — without traumatizing operations

The path isn't "cut everything". It's reducing cash conversion cycle intelligently:

1. Reduce average receivable days

• Negotiate partial advance payment in long-term contracts
• Offer small discount (1-2%) for cash payment
• Use receivable advance when financial cost is lower than operational margin
• Collect more agilely — collection automation reduces receivable days by 5-15 on average

2. Reduce average inventory days

• ABC analysis to identify low-turn SKUs
• Negotiate with suppliers more frequent deliveries in smaller batches
• Implement demand forecasting based on historical data
• Liquidate obsolete inventory even below cost — trapped capital is more expensive than discount

3. Increase average payable days — carefully

• Negotiate longer terms with large suppliers in exchange for guaranteed volume
• Centralize purchases for bargaining power
• Warning: extending term too much with small suppliers can break the relationship. Use only with those who absorb without resentment.

How much working capital is ideal

No single answer — depends on sector. Industry needs more (inventory weighs), services need less (no relevant inventory), retail is case-by-case (depends on supplier vs customer terms).

As practical reference, healthy working capital generally equals:

• Industry: 60-90 days of net revenue
• Commerce/retail: 30-60 days of net revenue
• Services: 15-45 days of net revenue
• B2B SaaS with recurring billing: can operate with minimum or negative working capital

Ideal is comparing with sector and monitoring trend more than absolute number. Company with stable working capital at 45 days is healthier than one at 60 days but trending down.

The minimum working capital dashboard

We recommend monitoring four indicators monthly:

• Net working capital (in R$ and days of revenue)
• Working capital need (WCN)
• Cash conversion cycle (in days)
• Treasury balance (NWC − WCN)

These four numbers, tracked monthly, prevent 90% of working capital problems. What kills healthy companies is almost never surprise — it's lack of visibility on what was always there.

The most important concept

Profit is accounting opinion. Working capital is real money. Company can have positive profit on income statement and negative working capital on balance sheet — and usually owners prioritize looking at the first number.

Inverting that priority — discussing working capital with same rigor as revenue — is usually the first step of mature financial management.