The investor’s field guide · W
Working capital
The resources tied up in day-to-day trading, commonly measured as current assets less current liabilities.
Explained by the editorial team
Working capital helps a business bridge the gap between paying for inputs and collecting from customers. The broad accounting definition is current assets less current liabilities. Acquisition agreements often use a narrower, negotiated definition that excludes cash, debt and certain other items.
A worked example
A company has £100,000 of trade receivables and £40,000 of stock, against £70,000 owed to suppliers. Those operating balances produce £70,000 of working capital. Slow customer payments or obsolete stock can make the headline number less useful than it appears.
What to examine
Compare monthly balances, not just the year-end snapshot. Seasonal businesses may need substantially more funding at particular points. A sale agreement may specify a normal level to be delivered at completion and adjust the price for any difference. The definition, measurement date and accounting policies matter. Buying a profitable company without enough money to fund its trading cycle can create an immediate cash shortage.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.