Working capital is a term that appears regularly in financial conversations about business health, but it is one that many founders have encountered without a clear sense of what it means or why it matters. Understanding working capital — and the difference between having enough of it and not having enough — is central to understanding how businesses stay liquid and operational day to day.
Working capital is the difference between a business's current assets — such as cash, money owed by customers, and stock — and its current liabilities — such as money owed to suppliers and short-term debts. Positive working capital means the business has sufficient liquid resources to meet its near-term obligations. Negative working capital means current liabilities exceed current assets, which can signal a liquidity risk even for a profitable business. Working capital management is about ensuring the balance remains healthy.
Working capital requirements vary considerably between business types — a service business with fast-paying customers and few large upfront costs has very different needs from a product business carrying inventory and waiting on extended payment terms. Growth can actually worsen working capital if it requires significant upfront investment before income arrives. Our guide to managing working capital covers the key dynamics for UK founders at different stages.