Working Capital: The Number That Decides How Fast You Can Grow

Two businesses with identical revenue and identical profit can have completely different capacities to grow. One can take on a large new client next month; the other would run out of money trying.

The difference is working capital — the money tied up in simply operating the business, rather than available to use.

The calculation

CURRENT ASSETS
  Cash                                £14,200
  Accounts receivable                 £31,600
  Stock                                £8,400
                                     ────────
                                      £54,200

CURRENT LIABILITIES
  Accounts payable                    £12,900
  Tax owed                             £9,300
  Loan due within 12 months            £6,000
                                     ────────
                                      £28,200

WORKING CAPITAL                       £26,000

Both figures come straight off your balance sheet. The number is what you'd have left if you collected everything owed to you and paid everything due within the year.

It's not spare money. It's the float the business runs on.

Why growth consumes it

The mechanism that catches people, and the reason a great quarter can be the dangerous one.

Every new customer means:

• Delivery costs paid before you invoice
• An invoice sitting in receivables for 30–60 days
• Possibly stock or subcontractors paid up front

None of that is a problem for one customer. Double the customers and you double the money tied up — and that happens before any of the additional revenue arrives.

This is the same arithmetic as the growth cash trap, viewed from the balance sheet rather than the forecast. Growth is funded out of working capital until the revenue catches up.

How much you need

A workable estimate:

Working capital requirement ≈ daily operating cost × cash conversion cycle

Where the cash conversion cycle is days to deliver and invoice, plus days clients take to pay, minus days you take to pay suppliers.

Daily operating cost £900 × 35-day cycle = ~£31,500 tied up just to run at current volume.

Then add a buffer for the largest single thing that could realistically go wrong — usually your biggest client paying two months late.

Compare that number to what you actually have. If the requirement exceeds the reality, you're already running tight, and growth will make it acute rather than gradual.

Five ways to free some up

Ordered by cost. The first four are free; only the last one has a price.

1. Take deposits. The single largest lever. A deposit on signature means the client funds delivery instead of you — it can turn the requirement negative on a project basis.

2. Invoice immediately. Not at month end. Every day between finishing and invoicing is a day of working capital you gave away for no reason. This is one of the highest-return things to automate.

3. Shorten client terms on new agreements. Net 14 rather than net 30. New clients generally accept it without comment, because it's simply what the contract says.

4. Extend supplier terms. The neglected half of the equation. Moving from paying at 14 days to 30 does exactly the same work as clients paying 16 days sooner.

5. Reduce stock, if you hold it. Stock is working capital sitting on a shelf.

Then, and only then, a revolving credit facility — arranged before you need it, because credit is easiest to obtain precisely when you can demonstrate you don't require it.

Negative working capital isn't automatically bad

Worth stating, because it looks alarming and sometimes isn't.

Some business models are structurally funded by customers. Subscriptions billed annually in advance, deposits before delivery, retainers paid at the start of the month — these collect before they spend, and they can operate on negative working capital indefinitely and comfortably.

The question isn't the sign. It's whether you can meet obligations as they fall due. A business with negative working capital and reliable prepayment is fine. A business with negative working capital because it's behind on supplier payments is not.

The current ratio is the quicker check on that distinction.

Watch the trend

The level matters less than the direction. Track it monthly alongside revenue:

| | Q1 | Q2 | Q3 | Q4 | |---|---:|---:|---:|---:| | Revenue | £96k | £104k | £118k | £131k | | Working capital | £26k | £31k | £39k | £51k | | As % of revenue | 27% | 30% | 33% | 39% |

Revenue grew 36%; working capital grew 96%. Each pound of revenue is consuming more cash than it used to — which means growth is getting more expensive, not cheaper.

The cause is almost always receivables climbing, and it's the same signal the balance sheet gives. Rising working capital as a share of revenue means the cycle is deteriorating, and that's fixable with terms rather than with more sales.

Where this stops and an accountant starts

How items are classified as current or non-current, how tax liabilities are recognised, and what any of it means for your filings are technical and jurisdiction-specific.

Those go to an accountant. What you should own is knowing your requirement, watching it as a share of revenue, and understanding that terms are a faster lever than borrowing.

The mistakes

1. Treating it as spare cash. It's the float the business runs on.
2. Not calculating the requirement before committing to growth.
3. Borrowing before fixing terms. Free levers unused, cost incurred.
4. Reading negative as automatically bad. Depends entirely on the model.
5. Watching the level, not the trend as a share of revenue. The trend is the finding.
6. Ignoring rising receivables. The most common cause, and the earliest visible.

What to do next

Calculate your requirement — daily operating cost times your cash conversion cycle — and compare it to your actual working capital. If the requirement is higher, you're already funding operations from timing luck.

Then start with deposits on new work. It's free, reversible, and it moves the number more than anything else available.