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Working capital is the cash and short term credit available to your business to cover its day to day costs, such as wages, rent, stock and supplier bills. It's calculated as current assets minus current liabilities, and it moves daily as money comes in from customers and goes out to cover expenses. This guide walks through how to calculate it, what the result means, and what to do if you don't have enough.
What is working capital?
Working capital is the money your business has on hand and available to spend right now, once you've accounted for what you're due to pay out. It includes cash in the bank, stock you can sell, and money customers owe you, minus the bills, wages and short term debts you need to settle within the next year.
Because payments go out and money comes in constantly, working capital isn't a fixed number. It's often described as a cycle, sometimes called the working capital cycle or cash conversion cycle, because it rotates continuously as your business trades. A supplier gets paid, a customer's invoice clears, stock gets sold, and the cycle starts again.
Why does working capital matter for your business?
Working capital is what keeps the lights on. It's what lets you pay staff, settle supplier invoices, and cover rent and utilities on time, without which your business can't function day to day. It also gives you room to grow. A business with strong working capital can take on a large order, buy stock ahead of a busy period, or say yes to new work, without waiting for cash to physically land in the bank. A business without it often has to turn work away, delay supplier payments, or dip into personal savings just to keep trading.
Falling short on working capital tends to show up first in small ways, a late supplier payment here, a delayed order there, but left unaddressed it can damage supplier relationships, hold back growth and, in serious cases, threaten the business's ability to keep operating.
How do you calculate working capital?
The working capital formula is:
Working capital = current assets − current liabilities
Here's how to work out each side of the equation.
1. Add up your current assets
This is everything your business owns that could reasonably be turned into cash within a year. It typically includes:
2. Add up your current liabilities
This is everything your business owes and needs to pay within a year. It typically includes:
3. Subtract your liabilities from your assets
Whatever's left is your working capital. It can be a positive or a negative number, and both are explained below.
A worked example
Say a small business has £15,000 cash in the bank, £20,000 worth of stock, and £25,000 owed by customers. That's £60,000 in current assets. Against that, it owes £18,000 to suppliers, £7,000 in short term loan repayments, and £10,000 in wages and tax. That's £35,000 in current liabilities.
£60,000 − £35,000 = £25,000 working capital
This business has £25,000 available to cover unexpected costs or reinvest in growth, once everything it owes in the next year is accounted for.
What does a positive or negative working capital figure mean?
Negative working capital isn't always a crisis. Some businesses, particularly those with fast stock turnover like supermarkets, operate with negative working capital by design, collecting cash from customers before they need to pay suppliers. But for most small businesses, a negative figure is worth investigating.
What is the working capital ratio and what counts as good?
The working capital ratio, also called the current ratio, measures how well your current assets cover your current liabilities. It's calculated as:
Working capital ratio = current assets ÷ current liabilities
Using the worked example above, £60,000 ÷ £35,000 gives a ratio of 1.71.
Working capital ratio | What it usually means |
|---|---|
Below 1.0 | Current liabilities are higher than current assets, which can make it hard to cover normal running costs and often prompts businesses to look at working capital finance |
Between 1.2 and 2.0 | Generally seen as a healthy balance, enough to meet day to day obligations and absorb unexpected costs without sitting on excess cash |
Above 2.0 | Assets comfortably outweigh liabilities, but a very high ratio can mean cash or stock is sitting idle rather than being reinvested in growth |
A ratio close to 1.0 isn't necessarily a problem if your cash flow is predictable, but most lenders and accountants like to see a working capital ratio somewhere between 1.2 and 2.0.
What is the working capital cycle?
The working capital cycle, also known as the cash conversion cycle, measures how many days it takes for cash spent on stock and expenses to come back in as cash from customers. It's calculated as:
Working capital cycle = inventory days + receivable days − payable days
For example, a business holding stock for 45 days, waiting 30 days to be paid by customers, but taking 40 days to pay suppliers, has a working capital cycle of 35 days (45 + 30 − 40). That's 35 days where cash is tied up in the business before it becomes available again. A shorter cycle is generally better, since it means cash is freed up more quickly. You can shorten your cycle by selling stock faster, collecting payments sooner, or negotiating longer payment terms with your own suppliers, without changing your overall level of working capital.
What is the difference between working capital and cash flow?
Working capital is a snapshot of your current assets minus your current liabilities at a single point in time, while cash flow tracks the actual movement of money in and out of your business over a period, such as a month or a quarter. Working capital tells you whether you could cover your short term obligations if everything came due today. Cash flow tells you whether the money is actually arriving in time to pay them. A business can be profitable and still have poor cash flow if customers pay slowly, which in turn can erode working capital over time. The two are closely linked, but managing one doesn't automatically fix the other. Our cash flow guide covers this in more detail, including how to forecast cash flow and spot problems early.
What causes negative working capital?
Negative working capital usually comes down to one or more of the following:
Identifying which of these applies to your business is usually the first step to fixing it.
How can you improve your working capital?
Tighten your credit control
Strong credit control means customers pay on time, which brings cash back into the business faster. A good business credit score also helps here, since it strengthens your negotiating position with suppliers and can unlock better payment terms.
Manage supplier payment terms
Pay suppliers within your agreed terms, but avoid paying earlier than necessary unless there's a discount worth taking. Every extra day you hold onto cash before paying out improves your position.
Reduce excess stock
Review how much stock you're holding and how long it sits before selling. Freeing up cash tied up in slow moving stock is one of the fastest ways to improve working capital without borrowing.
Keep on top of debtor and creditor days
Tracking how long customers take to pay you, against how long you take to pay suppliers, gives you an early warning system for working capital problems. Our guide on managing debtor and creditor days covers practical ways to bring both into better balance.
Do seasonal and growing businesses need more working capital?
Seasonal businesses often need more working capital to get through quiet periods without cutting stock, staff or marketing, then need it again to build up stock ahead of their next busy season. Retailers building up for Christmas, or hospitality businesses managing a slow winter, are common examples. Growing businesses face a similar squeeze for a different reason. Growth usually means spending more, on stock, staff and marketing, before the extra sales convert into cash. The bigger the growth, the bigger that gap tends to be. A business relying only on its own cash reserves will grow only as fast as customers pay it, while a business with access to working capital finance can take on new work and stock immediately, then repay once customer payments land.
What financing options can boost your working capital?
If your own cash and credit aren't enough to cover a gap, external finance can help. The right option depends on how much you need, how quickly, and how your business typically gets paid.
Type of finance | How it works | Best for |
|---|---|---|
Working capital loan | A lump sum repaid in fixed instalments, usually over 1 to 24 months | A one off gap or a planned cost |
Flexible borrowing on your existing bank account, with interest only on what you use | Smoothing small, everyday fluctuations | |
A reusable credit line you draw down and repay as needed | Ongoing or unpredictable cash flow needs | |
An advance against unpaid customer invoices | Businesses waiting on slow paying customers | |
An advance repaid as a percentage of future card sales | Retail and hospitality businesses with strong card sales | |
Funding to pay suppliers or import stock before you've sold it | Businesses funding stock or supplier orders |
Many businesses use more than one of these together, for example a working capital loan to cover a known gap, alongside an overdraft as a buffer for smaller day to day swings.
How much does working capital finance cost?
Your rate, term and the amount you can borrow depend on your revenue, cash flow, credit history and how long you want to repay over. Across the Capitalise lender panel, working capital loans typically fall within these ranges.
Feature | Typical range |
|---|---|
Loan amount | £1,000 to £500,000 |
Repayment term | 1 to 24 months |
Interest rate | From around 1.5% a month, roughly 6% to 30%+ APR |
Funding speed | As little as 24 hours after approval |
Security | Secured or unsecured options available |
Arrangement fees | Typically 1% to 3% of the loan value, varies by lender |
For an estimate of how much your repayments could be, you can use our business loan calculator.
Am I eligible for working capital finance?
To be eligible for working capital finance, most lenders on the Capitalise panel will typically expect your business to:
Get the working capital your business needs
If your working capital doesn't stretch far enough to cover what's coming up, you don't have to wait it out. You can compare working capital loans from our panel of 130+ UK lenders, all in one application with support from a dedicated funding specialist.
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