Working Capital

What is Working Capital?

Working capital is the amount of money a company has available for daily operations after subtracting what it owes in the near term. Calculated as Current Assets minus Current Liabilities, it reflects whether the business can pay suppliers, reimburse employees, and cover overhead without taking on additional debt. Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, accrued expenses, and short-term debt [1].

The metric appears on the balance sheet and gives finance teams a snapshot of short-term financial strength. A strongly positive balance signals the company can fund growth internally. Negative working capital suggests the organization may struggle to meet its obligations over the next 12 months.

How to Calculate Working Capital

The formula is straightforward:

Working Capital = Current Assets − Current Liabilities

Current assets include cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include accounts payable, wages payable, taxes owed, short-term debt, and accrued expenses. Both figures come from the company's balance sheet [1].

For example, a mid-size company with $2.5 million in current assets and $1.8 million in current liabilities has $700,000 in working capital. That $700,000 represents the buffer available for unexpected costs, delayed client payments, or investment opportunities.

A related metric, the working capital ratio (also called the current ratio), divides current assets by current liabilities. A ratio between 1.2 and 2.0 typically indicates healthy liquidity. Below 1.0, the company may not be able to cover near-term debts. Above 2.0, assets may be sitting idle rather than generating returns.

Why Working Capital Matters for Business Operations

Working capital determines whether a company can meet payroll, pay vendors on time, and absorb seasonal fluctuations without scrambling for short-term credit. When working capital runs thin, the consequences are concrete: missed supplier discounts, delayed reimbursement payments, and reliance on credit lines that carry interest costs.

For companies with significant travel and expense management obligations, working capital absorbs a specific kind of pressure. Business travel spending generates a rapid sequence of charges across flights, lodging, meals, and ground transportation. When employees pay out of pocket and submit expense reports manually, the reimbursement cycle can stretch two to four weeks. During that window, the company's accounts payable inflates, distorting the working capital picture until finance processes the claims.

APQC research shows the gap clearly: top-performing organizations approve and schedule T&E reimbursements in three days or fewer, while the bottom quartile takes a week or longer [2]. That difference isn't just an employee satisfaction issue. Longer reimbursement cycles mean larger accrued liabilities on the balance sheet, weaker cash flow forecasts, and more manual reconciliation effort at month-end close.

How Does Travel Spend Affect Working Capital?

Corporate travel creates three distinct working capital pressures that don't exist in most other operating expenses.

Timing mismatch. Unlike payroll or rent, T&E spending is initiated by distributed employees, submitted with variable lag, and reconciled through approval chains. The GBTA Foundation found the average expense report costs $58 to process manually, with 19% containing errors that add $52 each to correct [3]. The delay between when money leaves the organization and when finance accounts for it creates a persistent gap in cash flow visibility.

Prepaid and accrued balances. Conference registrations paid months in advance sit as prepaid expenses in current assets. Unreported employee expenses accumulate as unrecognized liabilities. Both distort the working capital calculation until they're properly classified.

Seasonal volatility. Quarter-end sales pushes, annual conferences, and regional planning offsites create travel spend spikes that compress working capital temporarily. Without real-time data, finance teams rely on lagging estimates to project these swings.

Companies that capture expenses at the point of transaction rather than waiting for batch submissions see a clearer working capital picture. Real-time expense data flows directly into the general ledger, replacing estimated accruals with actual figures and giving the finance team a current view of short-term obligations.

Best Practices for Working Capital Management

Finance teams that actively manage working capital rather than monitoring it passively tend to follow four principles.

1. Shorten receivable cycles, extend payable cycles. The wider the gap between collecting from customers and paying suppliers, the more cash stays available for operations. Negotiating net-60 terms with vendors while offering early-payment discounts to customers is one common approach.

2. Compress expense reimbursement timelines. When employees front business travel costs on personal cards, the company's real liabilities are invisible until reports are submitted. Navan processes expense reports in real time, matching transactions to policies automatically and reducing the typical reimbursement cycle from weeks to days.

3. Use corporate cards to shift timing. Corporate card programs move the payment obligation from the employee to the card issuer's billing cycle. This eliminates employee float, reduces accounts payable volatility, and provides immediate transaction data for cash flow forecasting.

4. Monitor the working capital ratio monthly. A ratio drifting below 1.2 warrants investigation. Seasonal travel spikes, a large outstanding invoice, or accelerated hiring can all pull the number down temporarily. Finance teams with real-time cash flow visibility catch these shifts before they compound.

When Should You Consider Alternatives to Working Capital Analysis?

Working capital measures short-term liquidity, but it doesn't capture every dimension of financial health. Supplement the metric when:

• Long-term solvency is the question. Debt-to-equity ratios and interest coverage ratios provide a better view of a company's ability to service long-term obligations.
• Cash flow timing is critical. A company can have strong working capital on paper but face a cash crunch if receivables are concentrated in the final weeks of the quarter. The cash flow statement breaks down actual cash inflows and outflows by period.
• Industry benchmarks vary widely. Retailers and restaurants often operate with negative working capital because they collect from customers before paying suppliers. A negative number that signals distress in one industry is normal in another.

Related Terms

• Employee Expense Management: How companies create policies and workflows governing employee-initiated spending from receipt capture through approval and payment.
• Expense Report Automation: The shift from manual expense processing to automated workflows that capture, categorize, and reconcile transactions without human intervention.
• Expense Management: An overview of integrated expense management platforms that connect corporate cards, receipt capture, and approval workflows.

Sources

[1] J.P. Morgan, "What is Working Capital? Formula & How to Calculate It," 2025, https://www.jpmorgan.com/insights/treasury/receivables/what-is-working-capital-formula-and-how-to-calculate-it

[2] APQC via CFO.com, "3 Ways to Accelerate Travel Expense Approval and Reimbursement," 2025, https://www.cfo.com/news/3-ways-to-accelerate-travel-expense-approval-and-reimbursement-metric-of-t/686769/

[3] GBTA Foundation, "How Much Does a Company's Expense Report Really Cost?" https://www.gbta.org/how-much-do-expense-reports-really-cost-a-company/ [NEEDS_CURRENT_SOURCE: widely cited in 2025 industry literature; original publication date unconfirmed]