Business Glossary
What Is Working Capital?
Working capital is the difference between current assets (cash, debtors, stock) and current liabilities (creditors, short-term debt). A business can be profitable but fail if it runs out of working capital.
The Formula
Working Capital = Current Assets − Current Liabilities (simplified: Debtors − Creditors)
Worked Example — UK SME
A UK wholesale business: debtors £85,000, creditors £54,000. Net working capital = £31,000. The business has £31,000 of net liquidity in its trading cycle.
UK Benchmark
📊 Positive working capital is essential. Most UK SMEs should maintain working capital equivalent to 1–2 months of revenue. Negative working capital is a warning sign.
Common Questions
What causes working capital to deteriorate?
Customers taking longer to pay, too much stock, paying suppliers faster than you collect, or rapid growth requiring cash investment before revenue arrives.
How do I improve working capital?
Four levers: reduce debtor days, extend creditor terms, reduce stock holding, increase gross margin.
What is the working capital cycle?
The time between paying for goods and collecting from customers. A shorter cycle means less cash tied up at any one time.
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