Working capital explained: the lifeblood of your company

2 min read

Current assetsMinus current liabilities

PositiveAssets cover short-term bills

The cycleCash → stock → sales → cash

What working capital is

Working capital is current assets minus current liabilities — the money and near-money you have available to meet short-term obligations. Positive working capital means you can comfortably cover the bills falling due in the next year; negative means you may struggle, even with a full order book.

The working-capital cycle

Cash flows in a loop: you spend cash on stock or materials, turn it into sales, wait to be paid, then have cash again. The working-capital cycle measures how long that loop takes. A long cycle ties up cash for longer, which is why fast-growing or seasonal businesses feel the squeeze even when trading well.

Why growth eats working capital

Counter-intuitively, growth can drain cash: more sales mean more stock to buy and more invoices to wait on before the money lands. That is the classic "growing broke" trap — profitable, expanding, and short of cash. Working-capital finance exists precisely to fund that gap. See cash-flow management.

Managing it deliberately

You can shorten the cycle from both ends: collect from customers faster (debtor days) and, where fair, take sensible supplier terms (creditor days). Reducing stock that sits too long helps too. Small improvements across the cycle free real cash.

Funding the gap when you need to

When the cycle stretches — a big new contract, a seasonal build-up — a short facility bridges the gap and is repaid as customers pay.

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Read the cash conversion cycle.

Frequently asked questions

What is a healthy level of working capital?

Enough to cover short-term obligations comfortably with a buffer — positive working capital and a current ratio around 1.5 is often cited, though the right level varies by sector and how fast you get paid.

Why does a profitable business run short of working capital?

Because profit is earned on paper when a sale is made, but cash arrives later. Growth makes it worse: you fund more stock and wait on more invoices before the cash comes back.

How does finance help with working capital?

A short-term facility fills the timing gap between outgoings and income, so you can pay suppliers and staff on time while waiting to be paid. It funds the cycle rather than the loss.