Working Capital

Working capital is the capital a business needs to fund its day-to-day operations: paying suppliers, staff wages, rent, and overheads before customer payments arrive. It is calculated as current assets (cash, debtors, stock) minus current liabilities (creditors, short-term loans due). A positive working capital position means the business has more short-term assets than liabilities.

Working capital problems are the most common reason UK businesses seek external finance. A business can be profitable on paper but insolvent in practice if customers pay slowly, suppliers demand quick payment, or a large contract requires upfront expenditure. Invoice finance, overdrafts, and short-term business loans are the primary tools for managing working capital gaps.

Growing businesses often need more working capital as they scale - more stock, more debtors, and more staff to pay before additional revenue arrives. Planning working capital requirements carefully before growth phases, rather than reacting to cash crises, leads to better outcomes and more competitive finance terms.

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