Working Capital Basics

Definition

Working capital = Current assets − Current liabilities

In plain English: the cash and near-cash you can use to fund day-to-day operations.

The working capital cycle

1. You pay suppliers (cash out)
2. You produce goods or deliver work
3. You invoice the customer
4. The customer pays (cash in)

The longer this cycle, the more cash you need to fund it.

Key ratios

• Current ratio = Current assets / Current liabilities (healthy: 1.5 – 2.0)
• Quick ratio = (Current assets − Stock) / Current liabilities (healthy: ≥ 1.0)
• Days Sales Outstanding (DSO) = (Debtors / Revenue) × 365 — lower is better
• Days Payable Outstanding (DPO) = (Creditors / Cost of Sales) × 365 — higher is generally better

Three quick wins

1. Take deposits on jobs over £2,000
2. Shorten DSO with direct-debit (GoCardless) for recurring work
3. Negotiate DPO with suppliers — even moving from 14 to 30 days frees real cash

Funding gaps

When the cycle is genuinely longer than you can fund from retained earnings, consider:

• Invoice financing (advances on unpaid invoices)
• Recovery Loan Scheme replacement (RLS3)
• Overdraft facility — usually cheaper than card debt
• Stripe Capital or Funding Circle for digital-first businesses

Use our cashflow planner to project working capital 13 weeks ahead.