Working Capital Requirement
The funding needed to finance the gap between current assets and current liabilities, particularly inventory and receivables minus payables for ongoing operations.
Working Capital Requirement
The amount of funding needed to finance a company’s day-to-day operations, particularly the gap between operating current assets (inventory and accounts receivable) and operating current liabilities (accounts payable).
For example, a growing manufacturer with $3 million in inventory, $2.5 million in accounts receivable, and $1.8 million in accounts payable would have a working capital requirement of $3.7 million ($3M + $2.5M - $1.8M), representing the investment needed to maintain operational continuity.
Working capital requirement differs from working capital (current assets minus current liabilities) by focusing on operating items directly tied to the business cycle rather than including financial items like cash investments or short-term debt. The metric reflects how much capital is tied up in operations and helps management understand cash flow implications of growth. Reducing this requirement through faster inventory turnover, improved collection processes, or extended supplier payment terms releases cash for other purposes. Working capital requirement typically increases with business growth, requiring additional financing through debt, equity, or improved operational efficiency.