What is working capital?

Working capital is a business's current assets — cash, stock and money owed by customers — less its current liabilities such as supplier bills, VAT due and short-term borrowing. It is what the business runs on day to day.

A plain-English definition for UK small businesses, not tax advice. Where a figure changes at a Budget, check gov.uk or ask your accountant.

LAST REVIEWED 29 AUGUST 2026 · BIZZLE

What is working capital, and why does it matter?

Current means within twelve months. Current assets are things that are cash or will become cash within a year; current liabilities are debts due within a year. The gap between them is the cushion the business runs on while it waits for customers to pay and pays its own bills.

Positive working capital means the business can meet its short-term obligations from its short-term resources. Negative working capital means it is relying on tomorrow's sales to pay yesterday's bills, which is survivable for a café taking cash daily and dangerous for a contractor paid sixty days after the job.

Growth eats working capital. Every extra job means more materials bought, more wages paid and more money owed by customers before anything comes in. Profitable businesses fail this way: the profit is real, but it is sitting in unpaid invoices while the bills fall due.

A worked example

A kitchen-fitting business at the end of a quarter. It has £8,000 in the bank, £14,000 of invoices outstanding from customers, and £6,000 of units and worktops in stock: current assets of £28,000. It owes suppliers £9,000, has a VAT return due of £4,000, and is £3,000 into its overdraft: current liabilities of £16,000. Working capital is £12,000.

It then wins two large jobs at once. Materials of £15,000 go on account with suppliers, two fitters' wages of £6,000 are paid from the bank, and the customers will pay on completion in six weeks. Current assets rise by the value of the work in progress, but the bank is now £4,000 overdrawn and suppliers are owed £24,000. The business is more profitable than it has ever been and closer to not making payroll than it has ever been.

How do you improve it?

Invoice the day the work is done, and chase on the day it falls due.
Ask for deposits on jobs with material costs, so customers fund the stock rather than you.
Agree longer terms with suppliers than you give customers, not the other way round.
Hold less stock. Stock is cash that cannot pay a bill.
Put VAT aside as it is collected, so the quarterly payment is not a liability the bank has to cover.

TERMS USED ON THIS PAGE

assets liabilities invoice VAT return VAT All terms →

COMMON QUESTIONS

Questions people ask.

Is working capital the same as cash flow?

No. Working capital is a position at a point in time — what is owned less what is owed, short term. Cash flow is the movement of money over a period. Weak working capital is usually what a cash flow forecast shows arriving a few weeks out.

Can working capital be too high?

Yes. A business with large cash balances, heavy stock and slow-paying customers has plenty of working capital and is using it badly. The cash could be earning, the stock could be smaller, and the customers could be paying sooner.

Does a loan count as working capital?

The cash from a loan increases current assets. The repayments due within twelve months are a current liability; the rest is long-term debt. So a loan improves working capital by the amount not due in the next year, which is why long loans help and short ones barely do.

How much working capital does a small business need?

Enough to cover the gap between paying for a job and being paid for it, across all the jobs running at once. A business on cash sales needs very little; one on sixty-day terms with materials bought up front needs two or three months of costs on hand.

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What is working capital?