Working capital is what is left of the money and assets you can turn into cash within a year, once you have covered the bills due in the same year: current assets minus current liabilities. On a limited company's balance sheet it is the line called net current assets. A positive figure means you can cover what is due, and a negative one means you will need to find the cash somewhere. It is a snapshot taken on a single day, and it moves every time a customer pays you or you pay a supplier, so what matters more than the figure is what sits inside it.

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What working capital is

Working capital is the money you have to run the business day to day, once the bills due within the year are covered. Think of it as a buffer. On one side is cash and everything that turns into cash: unpaid invoices, stock, money paid in advance. On the other is what you owe soon.

A decent buffer gives you room to take on a bigger order or ride out a slow month. A thin one means a single late payment leaves you short.

Both directions tell you something. If you are regularly running with negative working capital, you are either spending too much or earning too little, and sooner or later that shows up as cash flow problems: suppliers left waiting, a tax payment that has to be juggled, wages covered at the last minute. If you are always sitting on a very high figure, the opposite is true – you are not using your spending power. That money could be buying equipment, hiring someone, or funding the thing you have been putting off.

You will meet the same number under more than one name. 'Net working capital' and 'net current assets' both mean current assets minus current liabilities, which is the figure this page is about, and plenty of spreadsheets shorten it to NWC. 'Gross working capital' means the current assets on their own, before anything is taken off, which is a less useful thing to know.

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Where to find working capital in your own accounts

Your accounts have already done the subtraction. In the balance sheet format a small UK company files, working capital has a line of its own, and the only trick is knowing which lines feed it. The statutory format lists them in order, with a letter against each:

1. C. Current assets – stocks, debtors, short-term investments, and cash at bank and in hand.
2. D. Prepayments and accrued income – anything you have paid for in advance, such as rent or insurance.
3. E. Creditors: amounts falling due within one year – bank loans and overdrafts, trade creditors, and other creditors, including what you owe HMRC.
4. F. Net current assets (liabilities) – C plus D, less E. That is your working capital.

If you are working it out from scratch, the formula is the same thing written out:

Working capital = current assets − current liabilities

Here is an example balance sheet, with illustrative round numbers rather than a real company:

One thing to watch. Most people find heading C, subtract heading E, and stop. On the example above that gives £35,000 rather than £40,000, because prepayments sit on their own line outside current assets. It is a small difference here and a large one in a business that pays its insurance, rent, or software annually.

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What your working capital figure does not tell you

The figure is a snapshot taken on the date of your balance sheet. Pay a supplier the next morning and it changes. Invoice a customer and it changes again. So a single number, on its own, is closer to a photograph than a diagnosis – and there are three things it hides.

It does not say whether your assets will turn into cash in time. On the example above, £40,000 of working capital and a ratio of 1.8 both look comfortable. Take the £50,000 of stock out and you are left with £40,000 of assets against £50,000 falling due – £10,000 short. That business is solvent only if the stock sells, at something close to the value in the accounts, before the creditors need paying. Run that test on your own figures: strip out stock, then see what is left against what is due. If it is a long way behind, your working capital depends on selling, not on holding.

It does not follow profit. A profitable year can leave you with less in the bank than the year before, because profit is recorded when you make a sale and cash arrives when the customer pays. Growth makes this worse before it makes it better: more orders mean more stock bought and more invoices outstanding, so the money is in the business rather than available to it.

It does not mean much without the previous period. A ratio of 1.1 reads very differently depending on where you have come from. If the last three years ran between 0.7 and 0.9, you are fixing something. If they ran above 2.0 and have fallen steadily, something is going in the wrong direction – slowing sales, perhaps, or costs and debts rising faster than revenue. The trend is the information. The single figure is just the latest point on it.

Working capital is also not the same thing as cash flow, though the two move together. Working capital is a position on one date. Cash flow is money in and out over a period. Your balance sheet gives you the first; a forecast gives you the second, and you need both.

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What counts as a healthy ratio in your line of business

Working capital is often watched as a ratio rather than an amount, which means dividing instead of subtracting:

Working capital ratio = current assets ÷ current liabilities

Xero's guidance, published in April 2026, puts the usual range at between 1.2 and 2.0: below 1.0 can signal cash flow problems, and well above 2.0 may mean your assets are not being put to work. Treat that as a rule of thumb rather than a target, because the same ratio means different things in different businesses.

The ratio is worth having because the raw figure can mislead. Take two companies. Company A has £1.5m of current assets and £0.5m of current liabilities. Company B has £6m and £5m. Both have exactly £1m of working capital, so on the amount alone they look identical. But Company A's ratio is 3.0 and Company B's is 1.2. A quiet quarter or one unexpected bill would barely trouble Company A and could tip Company B.

Where it gets more interesting is what your current assets are made of. In a consultancy or an agency, most of them are cash and unpaid invoices, which become money within weeks and at a fairly predictable value. In a shop, a wholesaler, or a manufacturer, a large part is stock, which becomes money only when it sells and sometimes only at a discount. So a ratio of 1.5 in a service business is a more comfortable number than the same 1.5 in a stock-heavy one, and the lender reading your accounts knows that. It is also why the range quoted at you by a bank manager, an accountant, and an industry benchmark can all differ and all be reasonable. Our guide to the working capital ratio goes further into how to read yours.

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How much working capital your business needs

Enough to cover the gap between paying out and getting paid, and then some. The gap is the thing to measure first, and it is measured in days rather than pounds: how long between money leaving for stock, wages, and suppliers, and money arriving from customers. That is your working capital cycle, and it varies enormously by trade.

Then put a figure on it. Say your costs run at £40,000 a month, your customers pay in 60 days, and you pay your suppliers in 30 days. You are funding about a month of trading before the money comes back, so you need roughly £40,000 of working capital simply to keep going – before any buffer for a customer who pays late or an order bigger than usual.

Most small businesses have less room than that. Our research, published in April 2026, found that 28% have two months or less of cash in reserve, from a survey of 1,005 small business owners. If your cycle is longer than your buffer, the answer is to shorten the cycle, arrange funding, or both.

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Freeing up the cash already in your business

Before looking outside, there is usually cash to be found inside. Internal sources of working capital are the levers you already control – retained profits, selling assets you no longer use, cost savings – but three of them move the number faster than the rest.

Collect faster. The same research found the average small business is owed £22,000 by its customers. That is the single biggest pot for most companies, and it responds to unglamorous things: invoicing the day the work is done, agreeing payment terms in writing before you start, and chasing on the day an invoice falls due rather than a fortnight later. You can also check a prospective customer's reported payment performance on GOV.UK before you agree terms, which tells you how long they actually take to pay rather than how long they say they will.

Pay later, with agreement. Longer trade credit from your suppliers moves money back into your side of the balance sheet, and a reliable payer has room to ask for it. Taking it without asking is a different thing and costs you the relationship.

Hold less stock. Stock is cash you have already spent. Watch how quickly it turns over, clear the lines that are not moving, and order closer to when you need it. The caveat is that lean stock and a late delivery are a bad combination, so this lever has a floor.

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Bringing working capital in from outside

When the gap is bigger than the levers can close, external sources of working capital fill it. The main ones:

• A business overdraft – a buffer for temporary shortfalls, though the bank can reduce or withdraw it, often at the point you most want it. Read more on how a business overdraft works.
• Invoice finance – an advance against invoices you have issued but not been paid for, which suits companies with a large, steady debtor book.
• Trade credit – longer terms from suppliers, which costs nothing if you pay on time.
• A business loan – a set amount you draw and repay, which fits a gap you can see coming, such as a stock build before a busy season. Our guide to working capital loans covers what to look for.

If you are waiting on an invoice, an iwoca Flexi-Loan can cover the gap, and you can clear it with no early repayment fee once your customer pays. That is what the money is for here: paying this month's wages, supplier bills, or VAT on the date they are due, while the invoice that covers them is still working its way through someone else's payment run. A Flexi-Loan is a business loan with flexible repayment options of £1,000 to £1m, and the mechanics follow that job. You have 30 days to draw down after approval, so it can be agreed before the squeeze and taken in the week you need it. The term is fixed, at between 12 months and five years, but there is no fee for repaying early, so you can clear it as soon as the cash lands – many of our customers only take out our finance for a few weeks, or even days. A decision is typically made within 24 hours, though it might be longer depending on the complexity of the request. Every new Flexi-Loan needs a personal guarantee from at least one director, and we lend to UK limited companies.

Borrowing fixes a timing gap. It does not repair a business losing money on every job, and if your working capital is negative because of the trading rather than the timing, the forecast is the place to start.

Flexi-Loan in action: VCare24

Victoria Simpson's business delivers care and then waits on local authorities to pay, while her staff are paid every month. She draws around £200,000 to cover payroll and pays it back within a week, as the local authority payments come in.

Read Victoria's story

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Working capital FAQs

Does working capital include cash?

Yes. Cash at bank is a current asset, so it counts in both gross and net working capital. The measure that leaves it out is non-cash working capital, which strips out cash and short-term borrowing to show only what is tied up in trading.

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What counts as a current asset or a current liability?

A current asset is anything you expect to turn into cash within your operating cycle, normally 12 months: cash, trade debtors, stock, and prepayments. A current liability is anything falling due in the same period: trade creditors, accruals, short-term borrowing, and what you owe HMRC in VAT, PAYE, and corporation tax. Anything on a longer horizon – a four-year loan, your premises – belongs below the line and does not touch the figure.

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What working capital options does a new limited company have?

Fewer, and it is worth knowing that before you need them. With little trading history there is nothing for a lender to read, so the realistic sources in the first year or two are money the directors put in, trade credit from suppliers willing to take a view on you, and smaller amounts of borrowing. Anyone lending will look closely at the directors' own record and at what the company has actually invoiced, so the sooner you have a few months of real trading and filed figures behind you, the more choice you get.