What Is Working Capital?

Working capital is a way of telling how 'liquid' the cash available to a company is.

For example a business may have £1m of assets, and owe its creditors £500k, with a broad brush this means that if the creditors instantly called in the monies owed the business could use its assets to cover the amount owed. However not all assets can be quickly converted to cash or means to pay a creditor, which means that you need liquid assets to cover your short term commitments. Working capital allows you to see if a company can meet its short term commitments with the liquid assets it has available to it. A positive working capital is generally a good sign, and shows that the company has planned and is able to cover its short term liabilities using cash/stock/current debtors and other assets that can quickly be converted to payment.

A negative working capital means that if all short term creditors called in the debt, the company would not be able to meet these demands in the short term. Most companies start with a negative working capital as directors/banks inject cash to the startup which is repaid over a period of time. So the working capital should be heading towards positive territory in the first few years of the business, if it heads the other way, into negative territory it may indicate large scale investment using borrowed funds, or that the company is not generating enough cash.

By analysing and looking at a companies working capital from its accounts filed at companies house you can get an idea of the liquidity of the business, enabling you to provide a credit line suitable for the business at that time. Its important to credit check your customers at least once a year to see how their position has changed, a previously well funded business could be hit by the economic downturn or have had internal issues meaning it is unable to meet its liabilities.

A simple business credit check will analyse all these factors and provide you with a simple easy to read score and recommended credit rating for your customer, saving the hassle of trying to decipher the data yourself and make a decision on the credit that should be available to your customer. The credit reports provided can save you time and money, and help ease your company cashflow.

About the Author

Written by Sales Director at CheckMyClient - This article is based on 11 years experience of running small businesses with sustained growth over that period. Business credit reports have been very helpful in managing clients credit, you can get an instant company credit report online at checkmyclient.com

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