One of the fundamental responsibilities of running a small business is having a clear view of your finances at all times.
Today, tomorrow, and into the future, you need to know where your money is, where it’s going, and how much leeway you have to keep things operational.
That’s where working capital comes in. It’s one of the clearest indicators of your business’s short-term financial health—telling you whether you have enough resources to cover your immediate obligations.
In this article, we’ll break down what working capital is, why it matters, and how effective management can improve your SMB cash flow, operations, and overall growth potential.
We’ll also walk through common challenges SMBs deal with when it comes to working capital—and share smart strategies for building a stronger, more resilient financial foundation.
What Is Working Capital?
Defined in simple terms, working capital is the money your business has available to cover daily operations and run smoothly.
More specifically, it’s the amount you have left after you’ve covered short-term obligations like paying suppliers, covering payroll, and maintaining inventory.
There are two components to working capital:
- Current assets: Any resources you expect to use or convert to cash within a year.
- Current liabilities: Any short-term debts or financial commitments due within a year.
The working capital formula is quite simple. To figure out how much you have, simply subtract your liabilities from your assets:
Working capital = current assets – current liabilities
Let’s say you have $100,000 in current assets and $25,000 in current liabilities. Using the formula above, you would calculate that you have $75,000 in working capital.
But why is it so critical to be ever-aware of your working capital?
Most importantly, doing so can help you manage cash flow, cover day-to-day tasks, and navigate unexpected expenses.
Consider a clothing boutique that earns most of its revenue in July and August, but still pays rent and salaries year-round.
With enough working capital, that business can prepare for peak season by hiring seasonal staff and stocking inventory early—all without missing a beat during the quieter months.
In other words, working capital isn’t just a number—it’s a financial safety net, as well as a tool for growth.
Components of Working Capital
As mentioned above, working capital involves two main components: Current assets and current liabilities, representing what you own (or expect to receive soon) versus what you owe in the near future.
Current Assets
These are readily-available, short-term resources you can convert into cash, sell, or use within a year to help meet your day-to-day business needs. Current assets may include:
- Cash and cash equivalents: Funds in checking accounts, undeposited checks, and short-term investments like money market funds.
- Accounts receivable: Money owed by customers for goods or services already delivered, minus any expected non-payments.
- Inventory: Including raw materials, goods in progress (partially completed goods not yet ready for sale), and unsold goods.
- Prepaid expenses: Payments you’ve already made for services (e.g., insurance, software, rent) that provide future economic value for your business over the year.
- Notes receivable: Short-term loans, formally documented with a promissory note, issued to customers or suppliers, that are due within a year.
Other current assets might include tax refunds, employee advances to be repaid within a year, insurance claims you expect to receive, short-term deferred tax assets, and/or advance payments on future purchases.
Current Liabilities
Current liabilities are your short-term financial obligations; i.e. payments your business must make within a year. These liabilities may include:
- Accounts payable: Money your business owes to suppliers, vendors, or other stakeholders for products or services already received.
- Accrued tax payable: Taxes you owe to government authorities that you haven’t yet paid.
- Short-term debt: Any upcoming payments on long-term loans, including both interest and principal, due within the year.
- Wages payable: Salaries or wages owed to employees for work they have already performed.
- Unearned or deferred revenue: Customer payments received before delivering the product or service—these amounts may need to be refunded if your business cannot fulfill the sale.
Staying on top of both sides of the working capital equation can help ensure your business stays liquid, flexible, and ready for whatever the short-term future brings.
The Importance of Effective Working Capital Management
Managing your working capital effectively does more than just keep the lights on—it can strengthen your entire business.
Here are all the ways your business can benefit:
- Improve cash flow: A healthy cash flow helps maintain strong working capital. With a clear view of cash inflows and outflows, you can ensure you have enough cash on hand to meet daily operational needs.
- Reduce financial stress: By minimizing the risk of cash shortages, you can more easily and consistently navigate expected—as well as unexpected—financial obligations.
- Boost profitability: Effective working capital management leads to smarter resource allocation. By speeding up receivables, reducing excess inventory, and managing payables strategically, you can free up cash to reinvest in your business and drive growth.
- Streamline operations: Strong working capital management also supports timely purchasing, efficient inventory control, and quick responses to market changes—helping your business run smoothly without delays or disruptions.
- Secure funding: Lenders and investors view businesses with well-managed working capital as lower-risk, which can increase your chances of obtaining financing when you really need it.
For SMBs, managing working capital wisely is what helps you stay flexible, bounce back from challenges, and grow confidently in a competitive market.
Common Working Capital Challenges
Even well-run SMBs can face working capital challenges that threaten cash flow and day-to-day operations.
The good news? With the right strategies, these issues can be easily navigated.
Late Payments
When customers are late on payments, it can interrupt your entire cash flow, making it hard to cover expenses or pay suppliers.
To minimize the impact, consider the following:
- Set firm credit policies: Communicate clear terms upfront and confirm that customers understand your expectations.
- Offer early payment incentives: Provide small discounts to encourage customers to pay not only on time, but before the deadline.
- Implement robust collections: Prioritize consistent follow-up of overdue invoices. To ease the task, consider setting automated reminders for both yourself and your customers.
As a general note, avoid sales where you are uncertain the customer will pay at all. An upfront “no” is easier than an unpaid sale.
Too Much Inventory
Having more inventory than you need can unfortunately tie up your available cash. And not only that—it also raises the risk of items becoming outdated or even unsellable.
To keep things manageable, consider these strategies:
- Implement just-in-time (JIT) ordering: Order inventory only when you really need it. Having the minimum amount of inventory on-hand to meet demand will help reduce excess stock. It should also help bring down the cost of storage.
- Conduct regular stock audits: Make a habit of frequently checking on your inventory. This will help you flag slow-moving or outdated items, enabling you to adjust your purchasing strategy.
- Track inventory turnover: Regularly monitor and note how often you’re selling and replacing inventory. By paying close attention, you can help maintain more optimal stock levels without overstocking.
The main idea is to keep a healthy balance of enough stock to quickly sell, but not having too much of it collecting dust in an expensive warehouse.
Limited Access to Financing
Many SMBs struggle to secure traditional loans due to short credit histories, low business credit, or lack of collateral.
Here are a few ways to boost your chances of getting financing when you need it:
- Maintain strong financials: Always keep your financial records (including balance sheets, income statements, and cash flow statements) in order, and ensure you have a solid cash flow and a good credit score. Combined, these will make your business more creditworthy to funders.
- Explore alternative financing options: Contrary to what traditional banks offer, alternative financing is faster, flexible and more accessible for small business owners. For example, Bitty’s revenue-based financing (RBF) adjusts repayments based on your daily, weekly or monthly revenue, so you’re never locked into fixed schedules.
- Build relationships: Alternative lenders, as well as community banks, are generally more likely to finance small businesses. Engage early by asking for advice and insights on business growth. This can help build trust, get you on their radar, and open doors to future funding opportunities.
Ultimately, managing working capital is about staying proactive. That means being able to spot potential issues early on and taking smart steps to keep your business financially healthy.
Fictional Case Study: Overcoming Working Capital Challenges Strategically
Anna, who owns a custom-built furniture studio, is facing several working capital challenges like the ones mentioned above.
By addressing each challenge using proactive strategies, Anna can turn things around while reaping multiple benefits. Here’s how:
| Challenge | Strategy / Solution | Resulting Benefits |
| Late payments from customers | Offer early payment discounts; tighten credit terms | Improve SMB cash flow; reduce financial stress |
| Excess stock | Implement just-in-time inventory practices; minimize extra stock | Ensure liquidity; free up cash for other uses |
| Short supplier payment terms (15 days) | Negotiate new 30-day payment terms with suppliers | Guarantee liquidity; more flexibility in cash management |
| Production delays | Sync production with cash flow; optimize supply chain | Better operations flow; smoother production schedules |
| Securing a traditional loan | Explore alternative financing options (e.g., revenue-based financing) | Access to fast funding with flexible repayment terms |
After one year of applying these working capital strategies, Anna’s studio now has stronger financial footing, runs much more efficiently, and is ready to take advantage of new growth opportunities.
Other Working Capital Best Practices
When you prioritize your working capital, you optimize your business’s short-term stability as well as long-term growth.
In addition to the strategies above, be sure to implement these best practices to help your small business stay consistently proactive, adaptable, and financially healthy:
Track Key Metrics
Working capital is a moving target, so stay on top of your finances!
Monitor receivables, payables, inventory levels and cash flow closely—and regularly. This way, you can more easily identify and tackle issues before they become full-on business problems.
Leverage Technology
Streamline your entire working capital cycle with digital tools and software that can automate invoicing, expense tracking, inventory management, and more.
By reducing manual work, these systems also help minimize errors—and cut time. Plus, you benefit from real-time visibility into your business’s financial wellbeing.
Seek Expert Guidance
No time to manage working capital on top of everything else?
Hire in-house expertise or bring in a consultant. Financial professionals like bookkeepers, CFOs, and financial advisors can help you pinpoint inefficiencies, manage risk, and create smarter capital strategies.
Maintain Open Stakeholder Communication
Strong working capital is dependent on timely inflows and outflows.
Transparent, respectful and consistent communication with suppliers, customers, and funding partners can help build solid relationships, often leading to better terms, faster payments, and greater flexibility when your SMB needs it most.
Align Operations With Cash Flow
Managing your working capital effectively means operating within your means.
You can avoid extending your capital assets by syncing purchasing, production, and staffing decisions to the cadence of your cash cycle. This will ensure your capital is always working in step with your operations, versus trying to keep up with it.
When Your Small Business Needs Capital, Bitty Has Your Back
Managed effectively, working capital gives you the clarity and control to move proactively, plus the breathing room to seize growth opportunities as they arise.
That said, even with a solid working capital management approach, unexpected needs and emergencies can often pop up. In those moments, you may require financing to stay on track.
At Bitty, we offer flexible funding solutions built to move with your SMB, not against it.
When you partner with Bitty, you gain more than capital.
You also get a trusted ally who understands the daily challenges of running a small business—and who’s here to help you navigate those hurdles with the utmost confidence.
Let Bitty help you power smarter decisions. Get tailored, flexible revenue-based financing to move your business forward. Connect with us today!
