What Is Working Capital?

Working capital management is where finance operations meet FP&A strategy. While often overlooked in favour of P&L-focused planning, working capital directly determines whether a business can pay its bills, fund growth, and avoid unnecessary borrowing.

The formula is: Working Capital = Current Assets - Current Liabilities. Current assets include cash, accounts receivable, inventory, and prepayments. Current liabilities include accounts payable, short-term debt, accrued expenses, and the current portion of long-term debt.

The key components of working capital — often called the working capital cycle — are receivables (days sales outstanding, DSO), inventory (days inventory outstanding, DIO), and payables (days payable outstanding, DPO). The cash conversion cycle (CCC = DSO + DIO - DPO) measures how many days it takes to convert a pound invested in operations back into cash.

FP&A teams should forecast working capital alongside the P&L because revenue growth typically requires additional working capital. A business growing 30% annually may need to fund proportionally more receivables and inventory, creating a cash flow gap that the P&L alone does not reveal.

Some business models operate with negative working capital — collecting from customers before paying suppliers. SaaS businesses with annual upfront billing, retailers collecting cash at the point of sale, and subscription businesses all demonstrate this pattern. Negative working capital is not a problem; it is a source of free financing.

For UK businesses, working capital planning should account for seasonal patterns, VAT timing (quarterly payments to HMRC), PAYE and NI remittances, and the impact of payment terms on cash flow. Late payment remains a significant issue in the UK, with small businesses often waiting 30-60 days beyond agreed terms.