Working capital

The money tied up in running the business day to day — stock you have bought, invoices you are waiting on, bills you have not yet paid.

What it means

Working capital is your current assets minus your current liabilities: broadly, what customers owe you plus your stock and cash, minus what you owe suppliers, HMRC and anyone else within the next year.

In plain terms it is the money the business needs to have circulating in it just to keep operating at its current size.

Why it matters

Every business has a gap between paying for something and being paid for it. Working capital is what fills that gap, and the gap grows with the business.

This is why a business can win more work and get into more trouble. See overtrading — the classic way for a growing company to fail.

What it looks like in practice

Three levers, and they are the only three: get paid sooner (debtor days), hold less stock, or pay suppliers later — carefully, because supplier goodwill is worth more than the interest.

Invoice finance exists specifically to release money trapped in unpaid invoices, at a cost.

What to watch out for

Confusing a working capital problem with a profitability problem. They look identical from the bank balance and have opposite fixes: one needs collections and terms, the other needs pricing.

Funding a permanent working capital need with a temporary overdraft. If the gap is structural, the facility has to be too.

Where to get proper advice

Your accountant can calculate the working capital cycle in days from your existing accounts — how long money is tied up from paying a supplier to being paid by a customer. It is one number and it usually surprises people.