Working capital is the money a business needs to pay its short term expenses. These include: Expenditure such as staff training Raw materials or stocks of input Bills such as Utilities Wages for staff The amount of working capital held will vary depending on the type of business, credit terms with suppliers and credit terms with customers. A new business may not be able to negotiate credit terms with suppliers as they may see them as a risk, therefore the new business may not be able to give customers credit without raising capital. A business with too little working capital may end up with a negative cash flow, but a business that holds too much can be costly and wasteful.

An accountant may suggest that the ratio of current assets to current liabilities should be 2:1, i.e. that firms should hold twice the amount of assets to liabilities. The concept ‘current’ refers to a short period of time. WC is calculated as: Working Capital = Current Assets – Current Liabilities Current Assets are things that a business owns and change value on a day to day basis. These include: Stock Debtors Cash Current Liabilities are things that a business owes that must be paid within a year or less. These include: Bank Overdraft Supplier Trade Credit Short-Term Loans

The ‘Silly Sausages’ Fast Food Van Current Assets Stock1,000 Debtors10,000 Bank10,000 Current Liabilities Trade Credit1,000 Bank Overdraft 250 £19,750 Working Capital (Assets – Liabilities) Current Assets Things the business own Current Liabilities Things the business owes

Keith’s Coffee LTD Cash Raw Materials Labour (Remember Labour can be Manual or Capital) Finished Product Sales There should always be more cash at the end then at the start, this can be used to pay overheads and the rest is profit. Cash

Increase Money Coming In Get customers to pay more quickly Sell stocks to avoid holding too much Obtain external finance Increase Sales Negotiate later payments with suppliers* Spread costs out Sell off unused assets Lease rather than buy assets Decrease Money Going Out There are 2 ways to Improve working capital: *Sometimes there may be a payment due at a bad time. Think about a household situation – If work pays you on the 20 th of each month and your Phone bill is due on the 18 th of each month, you may want to negotiate to pay after you receive your wages i.e. After the 20 th … Similar problems occur in Business.