Working capital is the difference between a business's current assets, such as stock, trade debtors and cash, and its current liabilities, such as trade creditors and short-term borrowing. It measures the funds tied up in day-to-day trading and indicates whether a company can meet its short-term obligations as they fall due.
What it means
Positive working capital means short-term assets exceed short-term liabilities. Too little creates liquidity risk; too much can mean cash is trapped in slow-paying customers or excess stock.
Finance teams usually track working capital through days measures: debtor days, creditor days and stock days. Together these form the cash conversion cycle, the time between paying for inputs and collecting cash from customers.
How it works in a UK business
Growing businesses often find that growth consumes cash, because more sales mean more stock and more money owed by customers before any of it is collected. Construction and manufacturing firms feel this especially, through retentions, work in progress and long payment terms.
In a sale, buyers and sellers agree a normal level of working capital, and the price is adjusted if the actual level at completion differs.
Frequently asked questions
How can a business improve its working capital?
Common levers include invoicing promptly, tightening credit control, agreeing staged payments, negotiating longer supplier terms where fair, and reducing slow-moving stock. The right mix depends on the sector and customer relationships, so changes should be modelled in a cash flow forecast before they are rolled out.
Why does working capital matter in a business sale?
Buyers expect a business to come with enough working capital to trade normally. The sale agreement usually sets a target level, and the price moves up or down if the actual figure at completion is higher or lower, so poor working capital management can directly reduce sale proceeds.
Last updated: 5 November 2026