Glossary · UK
What is Working Capital?
The difference between a business's current assets and current liabilities, measuring its ability to meet short-term financial obligations and fund day-to-day operations.
Full Definition
Working capital is calculated as current assets minus current liabilities. Current assets include cash, trade debtors, stock and short-term investments -- resources expected to be converted to cash within 12 months. Current liabilities include trade creditors, short-term loans, PAYE/NI owed to HMRC and VAT payable. Positive working capital means a business can comfortably cover its immediate debts; negative working capital signals potential cash flow difficulties. Banks and lenders closely examine working capital ratios when assessing loan applications from small businesses. The working capital cycle describes how cash moves through the business: purchasing stock, converting it to sales, collecting payment from debtors, and paying creditors. VAT timing plays a significant role -- businesses on standard VAT accounting collect VAT from customers before remitting it to HMRC, creating a short-term liability. Cash-basis accounting for sole traders and partnerships can reduce VAT and tax timing mismatches. Improving working capital typically involves faster debtor collection, extending creditor payment terms, or reducing stock holding.