How to calculate working capital: formula, ratios and cycle

Working capital is the money a business has available to run day to day. You calculate it by subtracting current liabilities from current assets: working capital = current assets − current liabilities. A positive figure means you have more short-term resources than short-term debts; a negative figure means you may struggle to pay bills as they fall due. This guide is for owners and finance managers who want to work out their own figure, read the ratios lenders use and estimate how much cash their trading cycle ties up. When the numbers show a gap, Smart Funding Solutions can compare working capital finance from its lender panel, but the calculation comes first.

01What counts as current assets and current liabilities

Current assets (turn into cash within 12 months)	Current liabilities (due within 12 months)
Cash in the bank and in hand	Trade creditors (money you owe suppliers)
Trade debtors (money customers owe you)	Overdrafts and the portion of loans due within a year
Stock and work in progress	VAT, PAYE and corporation tax owed
Prepayments and other short-term receivables	Accruals and other short-term debts

You will find both totals on your balance sheet or in your management accounts.

02Working capital example

Illustrative example only — not a quote or offer of finance.

A small business has the following balance sheet items:

Current assets	£	Current liabilities	£
Cash	10,000	Trade creditors	3,000
Trade debtors	5,000	Loan repayments due within a year	2,000
Stock	8,000
Total	23,000	Total	5,000

Working capital = £23,000 − £5,000 = £18,000.

The business has £18,000 more in short-term assets than short-term debts. But only £10,000 is cash: the rest depends on customers paying and stock selling. That is why the quality of your current assets matters as much as the total.

03Working capital ratios

• Current ratio = current assets ÷ current liabilities. In the example, 23,000 ÷ 5,000 = 4.6. A ratio above 1 means current assets exceed current liabilities.
• Quick ratio (acid test) = (current assets − stock) ÷ current liabilities. It excludes stock, which may be slow to sell. In the example, 15,000 ÷ 5,000 = 3.

What counts as healthy varies by sector. A retailer paid in cash at the till can run with low or even negative working capital; a manufacturer offering long credit terms needs much more. Compare yourself with similar businesses and track the trend over time.

The business has £18,000 more in short-term assets than short-term debts.

04The working capital cycle

The working capital (or cash conversion) cycle measures how long cash is tied up between paying suppliers and being paid by customers:

Working capital cycle = stock days + debtor days − creditor days

• Stock days = (stock ÷ cost of sales) × 365
• Debtor days = (trade debtors ÷ sales) × 365
• Creditor days = (trade creditors ÷ cost of sales) × 365

Illustrative example only — not a quote or offer of finance.

A wholesaler holds stock for 45 days, gives customers 60 days to pay and pays its own suppliers in 30 days. Its cycle is 45 + 60 − 30 = 75 days. If it spends around £4,000 a day on stock and running costs, roughly 75 × £4,000 = £300,000 is tied up in the cycle at any time. Cutting debtor days from 60 to 45 would shorten the cycle to 60 days and free up around £60,000.

The shorter the cycle, the less funding the business needs. Growing businesses often run short of cash precisely because more sales mean more stock and more money owed by customers before any of it is collected.

£600,000A transaction we arranged£600K arranged, then another £400K as the business grew.A fast-scaling national training provider needed £600,000. Further funding followed as it grew, including a £400,000 facility.

05What negative working capital means

Persistent negative working capital can mean difficulty paying bills, pressure from suppliers and HMRC, reduced access to credit and, in the worst case, insolvency. If this describes your business, act early: review cash flow weekly, talk to creditors and take advice from your accountant. Free help is listed on GOV.UK's business support finder.

06How to improve working capital

07Why lenders look at working capital

Working capital and the ratios above are among the first things lenders and trade suppliers check, because they show whether a business can meet short-term obligations. A strong current ratio with slow-collecting debtors tells a different story from one backed by cash, so lenders usually look at the aged debtor list and bank statements too.

08Finance that can support working capital

If the calculation shows a timing gap rather than a loss, finance can bridge it. Invoice finance releases cash from unpaid invoices and so directly shortens debtor days; a revolving credit facility suits gaps that come and go; and working capital loans cover a specific, known shortfall. Borrowing should support a sound business, not mask a structural loss; if the underlying problem is profitability, fix that first.

If you want to compare working capital finance, you can explore funding options online. It is free to enquire, and any broker fee is disclosed separately before you proceed.