Working Capital
Fonds de roulement in French
Quick definition
Working capital is your current assets minus your current liabilities: roughly, the cash, receivables and inventory you have, minus the bills due within a year. It is the money that keeps the lights on between paying for work and getting paid for it.
Current assets minus current liabilities
Take everything the business owns that is cash or will become cash within a year: the bank balance, accounts receivable and inventory. Subtract everything due within a year: accounts payable, the drawn portion of a line of credit, upcoming loan payments and taxes owing. What remains is your working capital.
Say a shop has $15,000 in the bank, $40,000 owed by customers and $25,000 of inventory, for $80,000 of current assets. It owes suppliers $30,000, has drawn $12,000 on its credit line and owes $8,000 in taxes, for $50,000 of current liabilities. Working capital is $30,000. That cushion is a measure of liquidity: the room to absorb a slow month without missing a bill.
What working capital actually funds
Almost every business pays for its inputs before it collects for its outputs: buy inventory or pay staff today, deliver the work, then wait 30 or 60 days for the customer to pay. Working capital bridges that wait, and the longer the stretch between spending the money and getting it back, the more of it you need. Cash flow tells you what moved through the account this month; working capital tells you how much cushion sits between you and a missed payroll if collections slow down.
Signs of trouble, including the growth trap
Persistently negative working capital, where short-term bills exceed short-term resources month after month, means the business is running on borrowed time and borrowed money. One late-paying big customer and there is nothing to absorb the shock.
The less obvious danger is growth. Growing sales eat working capital. Double your orders and you must buy twice the inventory and carry twice the receivables, all funded up front, while the extra profit arrives months later. Many businesses fail not in a slump but in a boom, expanding faster than their cash can support. If sales are climbing while the bank balance keeps shrinking, that is not a paradox; it is arithmetic, and it deserves attention before it becomes an emergency.
How Canadian small businesses finance it
The standard tool is a business line of credit: draw when the gap is wide, repay when customers pay, with interest only on what is drawn. Supplier terms are the second tool: every day a supplier gives you before payment is due is working capital lent to you for free. Some businesses also sell their invoices to a financing company at a discount to get cash immediately, a costlier route that trades margin for speed. Whatever the mix, match the financing to the gap, and do not fund a permanent working-capital need with panic borrowing at high rates.
In Canada
Canadian lenders look hard at working capital when reviewing small-business credit. A common check is the current ratio, current assets divided by current liabilities, with lenders generally preferring a comfortable margin above 1. The Business Development Bank of Canada and the major banks offer working-capital loans and lines designed for the pay-now, collect-later gap. And remember that GST/HST collected and payroll deductions sitting in your account are not really working capital, even though they inflate the bank balance.
Worked example
Marc's cabinet shop wins its biggest contract yet: $90,000 of built-ins, payable 45 days after delivery. To build them he must spend $35,000 on materials and $25,000 on wages over two months, before seeing a cent. His working capital going in is $20,000, leaving a $40,000 hole. He covers it with a $30,000 draw on his line of credit and a 15 % deposit negotiated into the contract. The job is profitable, but only the working-capital plan made it survivable.
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026