Working Capital

Working capital is the financial buffer that keeps a business operational between the money going out and the money coming in. It is calculated as current assets minus current liabilities - where current assets include cash, unpaid customer invoices, and stock on hand, and current liabilities include supplier invoices due, short-term loans, and other obligations payable within 12 months. A positive figure means the business has more liquid resources than near-term obligations. A negative figure means short-term debt exceeds short-term resources - a warning sign regardless of how profitable the business appears on paper.

How Working Capital Is Calculated

The formula is: Working Capital = Current Assets - Current Liabilities.

A useful companion measure is the current ratio: Current Assets divided by Current Liabilities. A ratio above 1.0 means the business can meet its short-term obligations from current resources alone. For construction and project-based businesses, a current ratio of at least 1.2 is generally recommended (anterratech.com, 2025) to absorb payment delays without drawing on credit. A ratio below 1.0 is a liquidity risk even if the business is trading at a profit.

Working capital changes every time money moves. Raising an invoice increases current assets (the amount owed to you). Receiving payment converts that receivable into cash. Placing a purchase order creates a future liability. Understanding which actions tighten or ease working capital helps operators make better decisions around invoice timing, procurement scheduling, and credit terms.

Why Project-Based Businesses Face Particular Pressure

In a project-based business, costs arrive continuously but income arrives in milestones. Materials and labour are paid weeks before the customer invoice is issued and settled. Retainage withholds 3-10% of contract value until practical completion or beyond. A majority of subcontractors surveyed in the Billd 2025 National Subcontractor Market Report reported dipping into profit margins to maintain working capital - a pattern that erodes annual profitability even when individual jobs appear healthy.

Among smaller construction companies, working capital as a proportion of revenue climbed from 8.3% to 17.8% between 2016 and 2025 (NASBP). This reflects growing investment in operational reserve to handle payment delays, retainage positions, and materials procurement obligations that run ahead of billing cycles.

Three disciplines protect working capital most directly: invoice at the earliest trigger point each milestone allows rather than at convenience; track retainage as a named receivable with explicit release dates logged at contract signing; and confirm sub-contractor costs against purchase orders before issuing the customer final invoice.

Zigaflow links each invoice to the job record that holds all associated costs and purchase orders, so operators can confirm cost capture is complete before the invoice goes out - reducing the gap between job completion and cash receipt.