Working capital

Definition

Working capital is the capital a business uses to meet its short-term obligations and keep trading day to day. It is calculated as current assets minus current liabilities — what you own and expect to convert to cash within a year, less what you owe within the same window. Positive working capital means you can cover near-term bills; negative means you may not.

In plain terms

Working capital is the oil in the engine. It is the cash, stock and money owed to you (your receivables) that funds the everyday running of the business — paying suppliers, staff, rent and VAT before customer payments land.

Profit and working capital are not the same thing. A business can be profitable on paper yet run short of working capital because cash is tied up in unpaid invoices or stock on the shelf. Many otherwise healthy companies hit trouble not because they stop making money, but because they run out of cash to fund the gap between paying out and getting paid in.

How to calculate it

The headline figure is simple:

Item	Example
Current assets (cash, stock, receivables)	£180,000
Current liabilities (payables, short-term debt, VAT due)	£120,000
Working capital	£60,000

For a sharper view, look at net working capital and the working-capital cycle — how many days cash is tied up between paying suppliers and collecting from customers. A long cycle means more funding is needed to keep the wheels turning.

Why it matters to your business

Working capital determines whether you can say yes to opportunities and survive shocks. Too little, and a single late-paying customer or a quiet month can stop you paying staff. Too much idle cash, and you are leaving money on the table that could fund growth.

Most short-term business finance exists to bridge working-capital gaps: a seasonal stock build, a large order that needs paying for before the customer pays you, or a tax bill landing before revenue does. Used well, a working-capital facility smooths the timing mismatch without diluting ownership.

An example

A catering company wins a contract to supply a summer festival. It must buy £50,000 of stock and pay casual staff weeks before the festival pays its invoice 60 days later. On paper the contract is highly profitable, but the firm only holds £20,000 in spare cash — a £30,000 working-capital gap.

Rather than turn the work down, it draws a short-term facility to cover the gap, fulfils the contract, and repays once the festival settles. The funding cost is a fraction of the profit the contract delivers.