3.7.2—Working capital
- Syllabus
- First assessment 2024
- Objective
- 3.7.2
- Level
- HL
Working capital is the short-term operating cushion
Working capital = current assets − current liabilities. It funds day-to-day activity, but current assets differ in liquidity: cash can settle a bill now, while stock or debtors must first be converted.
A business can be profitable yet cash-poor if it offers long customer credit or holds too much stock. Working-capital management therefore links inventory, receivables, payables and short-term borrowing to the operating cycle.
If current assets are £11.2m and current liabilities £11.5m, working capital is −£0.3m. The firm may need faster collection, stock reduction or negotiated supplier terms, but each can affect service, margin or relationships.
Positive working capital does not guarantee immediate cash and negative working capital is not always fatal in a fast-cash retail model. Interpret the composition, timing and business model.