Working Capital Cheatsheet

Working capital relates to the liquidity of a business. It’s defined as ‘the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities’.

Why is it important?

Working capital is used to fund operations and meet short-term obligations. If a company has enough working capital, it can continue to pay its employees and suppliers and meet other obligations, such as interest payments and taxes, even if it runs into cash flow challenges.

The pandemic has exacerbated the need to manage working capital given supply chain challenges, increasing levels of default but also acquisition and growth opportunities.

What sort of finance should a business use? There are some key questions to consider: 

• How quickly do they need the funds? 
• Is there property security being offered?  
• Does the customer import goods or have debtors? 
• How rate-sensitive is the customer?  

Answers to these questions will help determine the best options.