At a glance
Working capital is your current assets minus your current liabilities. It helps show your short-term financial position, but it is not the cash you can spend today. Stock may take months to sell, customers may pay late and bills may fall due first. For an Irish business owner, the useful next step is to connect the balance sheet to actual collection and payment dates. A positive working capital figure needs a cash check before you commit to another order, hire or repayment.
You can have €100,000 of working capital and still be €30,000 short of paying the next fortnight’s bills.
That is not a contradiction. Your accounts may include stock in a warehouse and money customers owe you. Neither is necessarily available when payroll leaves the bank.
The question worth asking is: where is the money tied up, when will it arrive, and what must be paid before then?
What is working capital?
The standard calculation is:
Working capital = current assets − current liabilities.
Take both figures from the same balance-sheet date. Current assets commonly include cash, trade receivables, stock and prepayments. Current liabilities can include unpaid suppliers, accrued costs, tax balances and short-term borrowing.
Trade receivables, also called debtors, are amounts customers owe you. Trade payables, or creditors, are amounts you owe suppliers. Prepayments are costs paid in advance, such as insurance covering future months; they are not another pot of cash.
Working capital is often called net working capital. Some reports use a narrower operating measure that excludes cash and financing balances. Ask which definition is being used before comparing figures. Stripe explains the distinction between the standard and operating calculations.
The total gives you a starting point. The composition and timing decide how useful that starting point is.
A working capital example: €100,000 on paper, a €30,000 cash gap
Consider a fictional Irish wholesale business. The following is a simplified illustration, not a client case. It shows all its current balances at the reporting date. Receivables and supplier balances include VAT where applicable; stock is at its accounting carrying value, excluding recoverable VAT. The tax balance is an assumed amount already owed, not a tax calculation.
| Current balance | Asset | Liability |
|---|---|---|
| Cash at bank | €30,000 | |
| Customer invoices outstanding | €70,000 | |
| Stock | €100,000 | |
| Supplier invoices outstanding | €65,000 | |
| Tax owed | €20,000 | |
| Short-term loan principal owed | €15,000 | |
| Total | €200,000 | €100,000 |
Working capital is €200,000 − €100,000 = €100,000.
Now check the next 14 days. The business expects to collect €25,000 from the invoices already outstanding. It must pay €35,000 of the supplier balance, the €20,000 tax balance and €5,000 of loan principal. Payroll and overheads for the coming fortnight require a further €25,000. These future operating costs were not liabilities at the earlier reporting date. Assume no other receipts, payments or available borrowing.
| Next 14 days | Cash movement |
|---|---|
| Opening cash | €30,000 |
| Expected customer receipts | +€25,000 |
| Supplier payments | −€35,000 |
| Payroll and overheads | −€25,000 |
| Tax payment | −€20,000 |
| Loan principal repayment | −€5,000 |
| Projected cash after the fortnight, before corrective action | −€30,000 |
The business needs to resolve a €30,000 funding gap under those assumptions. It may also face a larger gap within the fortnight if payments precede receipts.
Its stock value does not pay the tax bill. The remaining customer invoices do not help unless the cash arrives in time.
Before approving another purchase, the owner needs a dated plan: which receipts can be collected, which optional commitments can be changed, and whether suitable funding is available. Promised collections need checking. Payment changes need agreement.
What is a good working capital ratio?
The current ratio, also called the working capital ratio, is:
Current assets ÷ current liabilities.
Our example gives €200,000 ÷ €100,000 = 2.0. Yet it still has a near-term cash gap.
There is no ratio that makes every business safe. Assess asset quality, timing, the operating model and the trend. ACCA’s working capital guidance explains why even a ratio above one does not guarantee liquidity, particularly with slow-moving stock.
Do not improve the dashboard by letting an old debtor or unsaleable product sit at an unrealistic value. Ask your accountant whether the balances need adjustment.
Why growth can make cash tighter
More orders can require stock deposits, freight and delivery costs before the customer pays. A bigger agency project can need staff or contractors before the final milestone is invoiced.
The sales target and the cash plan therefore need separate assumptions. In my agency finance guidance, I make that distinction between when you invoice and when the money actually lands. Winning the work is one event. Funding its delivery is another.
For a stock business, compare the next buying commitment with actual sell-through. A seasonal sales target cannot justify an order by itself. Ask what happens if the goods sell more slowly, at a lower margin or after the supplier payment is due.
Our inventory accounting guide covers the stock records and valuation behind that decision. The working capital question is whether you can fund the time between buying and collecting.
How to release cash without confusing the numbers
Start with the largest balances that have a realistic route to cash.
Customers: separate disputed invoices from simple late payment. Find the missing approval, agree a payment date and assign someone to follow up. Use our accounts receivable guide for the collection process.
Stock: identify slow movers and committed purchase orders. Review what you can cancel or change under the supplier agreement. Test the cash and margin effect before discounting products. A sale at a loss may generate cash while damaging profitability.
Suppliers: compare agreed payment terms with your collection pattern. Discuss changes before the due date. Delaying a payment without agreement can damage a supply relationship precisely when you need it.
Collecting an invoice converts a receivable into cash. By itself, that does not increase total current assets or net working capital. Paying a current supplier balance reduces cash and liabilities together, so the net working capital figure is also unchanged by that payment alone.
Those actions can change liquidity without changing the headline measure. Give the cash-release plan its own targets: receipts collected, stock converted and the lowest forecast bank balance.
When borrowing helps, and when it adds pressure
A facility can bridge a temporary timing gap. It needs a credible repayment route.
The Strategic Banking Corporation of Ireland explains invoice finance as a way to release cash against outstanding customer invoices. Eligibility, charges and the actual agreement matter. It is not a promise that every invoice or business will qualify.
My concern with revenue-based finance is what the repayments leave behind. Revenue is not spare cash. Test the payment schedule against wages, stock, tax and other commitments before accepting a facility.
Comparing repayments with profit can flag pressure, but profit alone is not a debt-affordability test. Include the actual cash movements and downside assumptions. Borrowing does not make weak margins or uncollectable invoices disappear.
Use a cash-flow forecast to identify the timing and size of the gap. Keep undrawn credit separate from cash already in the bank.
What your monthly finance review should answer
You should leave the review knowing which balances are tying up cash, which payment dates matter and who owns the next action.
Ask for the working capital balance alongside the overdue debtors, stock concerns and short-term cash forecast. Compare the previous plan with what actually happened. If a customer missed the promised payment, update the next decision rather than carrying the old assumption forward.
Around Finance’s management accounts service connects reporting with a review of the business. Reporting frequency, forecasting and responsibilities are agreed for your engagement.
If your Irish business turns over €250,000 or more and you need clearer numbers before your next commitment, book a Finance Fit Call.
FAQs
What is working capital in simple terms?
It is the difference between your current assets and current liabilities at a stated date. It helps assess short-term resources and obligations, but includes balances such as stock and unpaid invoices that may not be cash yet.
Is working capital the same as cash flow?
No. Working capital is a balance-sheet measure at a point in time. Cash flow records or forecasts receipts and payments over a period. Use both to understand the balances and when money will move.
Can a business have positive working capital and still run out of cash?
Yes. Assets may convert to cash after liabilities fall due. Slow customer payments, stock that takes time to sell and upcoming operating costs can create a gap despite a positive headline figure.
Does collecting customer invoices increase working capital?
Collection normally replaces a receivable with cash. It improves access to cash but does not, by itself, increase net working capital. A credit loss or other accounting adjustment is a separate event.
Is negative working capital always a problem?
It is a reason to investigate. Some businesses collect from customers before paying suppliers and can operate with negative working capital. Assess their payment cycle, commitments and resilience rather than assuming the sign alone proves safety or failure.
How much working capital does my business need?
Calculate the funding needed across your own operating cycle and test slower receipts, stock commitments and seasonal changes. A generic ratio or number of months cannot replace that exercise.
