Working Capital Explained for Growing UK Businesses

A business can be profitable on paper and still struggle to meet its day to day financial commitments.

The reason often comes down to timing. A company may have significant sales and outstanding invoices, but customers might not pay for 30, 60 or 90 days. Meanwhile, suppliers, taxes and other operating costs still need to be covered.

This is where working capital comes in.

Working capital provides a measure of a company’s ability to meet its short term obligations using its short term assets. For growing UK businesses, managing working capital becomes particularly important as transaction volumes increase, operations expand internationally and more money becomes tied up in inventory or accounts receivable.

According to the British Business Bank, working capital supports day to day business operations.

Quick answer: Working capital is the difference between a business’s current assets and current liabilities. It provides an indication of whether the business has sufficient short term resources to meet its short term financial obligations.

It is important because it helps a business meet its short term financial obligations and continue operating while waiting for revenue and customer payments to arrive.

A business may be growing successfully but still experience pressure on working capital if money is tied up in unpaid invoices, inventory or other current assets.

Effective working capital management can help businesses maintain operational continuity, manage periods of growth and respond more effectively when the timing of incoming and outgoing payments changes.

What is working capital in business?

Working capital is generally calculated by comparing a company’s current assets with its current liabilities.

Working capital = Current assets − Current liabilities

Current assets typically include assets expected to be converted into cash within the short term, such as:

• Cash
• Accounts receivable
• Inventory
• Certain other short term assets

Current liabilities can include:

• Amounts owed to suppliers
• Taxes due
• Short term financial obligations
• Other liabilities due within the relevant period

Source: Payoneer

For example, imagine a business has:

Current assets: £5 million

Current liabilities: £3.5 million

Its working capital would be:

£5m − £3.5m = £1.5m working capital

A positive figure means current assets exceed current liabilities.

However, the number alone doesn’t tell the whole story.

A large proportion of current assets might consist of inventory that cannot be sold quickly or invoices that customers have not yet paid.

Businesses therefore need to understand both the amount and composition of their working capital.

Working capital vs cash flow: What’s the difference?

Working capital and cash flow are closely connected, but they are not the same thing.

Working capital compares current assets with current liabilities at a particular point in time.

Cash flow tracks money moving into and out of a business over a period.

WORKING CAPITAL	CASH FLOW
Balance sheet measure	Tracks movement of money
Current assets minus current liabilities	Money coming in minus money going out
Indicates short term financial position	Shows timing of receipts and expenditure
Includes items such as receivables and inventory	Focuses on actual cash movements

A company can therefore report positive working capital but still experience cash flow pressure.

For example, £2 million might be owed by customers, but if those invoices have not yet been paid, that money cannot necessarily be used to meet an obligation due today.

The UK Insolvency Service provides guidance for company directors on understanding and managing cash flow.

Why is working capital important for a business?

1. It supports day to day operations

Businesses have ongoing financial commitments regardless of when customers pay.

Working capital helps support normal operational expenditure and short term obligations.

This is why working capital shouldn’t be viewed only as an accounting metric. It directly relates to a company’s ability to operate.

2. It helps manage payment timing

B2B businesses frequently provide customers with payment terms.

An invoice may be issued today but not become payable for 30 or 60 days.

During that period, the business may still need to pay suppliers and meet other obligations.

This creates a potential working capital gap.

For more on improving the processes around incoming business payments, see Payoneer’s Get Paid by Clients resources.

Businesses should also consider how accounts receivable processes affect the time between issuing an invoice and receiving the corresponding payment.

3. Working capital can support growth

Growth can consume cash before it generates additional cash.

A business expanding into a new market may need to increase inventory, purchase services from additional suppliers or make other investments before the resulting customer payments arrive.

This creates an important principle:

Revenue growth and working capital requirements can increase together.

The faster a business grows, the more important it can become to understand when money is coming in and when financial commitments become due.

4. It can help businesses manage unexpected costs

Business costs don’t always follow forecasts.

Supplier prices can change, equipment can require replacement or an unexpected opportunity may require additional short term expenditure.

Appropriate working capital can give a business greater flexibility when circumstances change.

5. It can support seasonal businesses

Some businesses experience significant differences in demand throughout the year.

An eCommerce company, for example, might need to purchase inventory months before its busiest sales period.

The company therefore commits cash before it receives the corresponding customer revenue.

Understanding the working capital cycle can help finance teams plan for these periods.

What is the working capital cycle?

The working capital cycle describes how money moves through everyday business operations.

Source: Payoneer

A simplified product based cycle could look like:

Cash → Inventory purchased → Product sold → Invoice issued → Customer pays → Cash received

For a service business:

Operating costs → Service delivered → Invoice issued → Customer payment due → Payment received

The longer money remains tied up within the cycle, the greater the potential pressure on working capital.

Three areas are particularly important.

Accounts receivable

How long does it take customers to pay?

Longer payment periods can keep more money tied up in receivables.

Inventory

How long does stock remain unsold?

Excess inventory can represent substantial capital that isn’t readily available for other business requirements.

Accounts payable

When does the business need to pay suppliers?

The relationship between supplier payment terms and customer payment terms can materially affect working capital.

How can businesses improve working capital?

There isn’t one universal solution.

Businesses should identify where capital is becoming tied up within their own operations.

Improve accounts receivable

Reducing unnecessary delays between invoicing and payment can improve the working capital cycle.

Businesses can consider:

• Issuing invoices promptly
• Establishing clear payment terms
• Tracking outstanding invoices
• Sending appropriate reminders
• Resolving invoice disputes quickly
• Automating appropriate accounts receivable processes
• Improving reconciliation

Eligible businesses operating internationally can also review Payoneer’s Get Paid by Clients solutions for supported B2B payment requirements.

Review inventory management

Businesses holding physical stock should understand how quickly inventory is moving.

Purchasing significantly more stock than required can tie up capital unnecessarily.

However, reducing inventory too aggressively can create different operational problems.

The appropriate level depends on demand, supply chains and the business model.

Review supplier payment processes

Businesses should understand when supplier payments become due and incorporate those commitments into working capital forecasts.

The aim isn’t simply to delay payments. Maintaining appropriate supplier relationships and meeting agreed obligations remain important.

Instead, finance teams should understand the timing of outgoing payments alongside expected incoming payments.

Improve financial visibility

Larger organisations may have working capital distributed across different business units, markets and systems.

Finance teams need reliable information about:

• Receivables
• Payables
• Inventory
• Expected payments
• Upcoming obligations
• Transaction volumes

At a larger scale, connected treasury, ERP, accounting and payment systems can help finance teams gain a clearer picture of these different components.

What is working capital business finance?

Working capital finance refers to financing intended to support a company’s short term operational requirements.

Businesses may consider working capital finance when experiencing temporary cash flow gaps or when additional short term funding is required to support business activity.

Potential approaches vary considerably depending on the business, provider and circumstances.

The British Business Bank provides independent guidance on how working capital finance works and the options businesses may encounter.

Businesses considering finance should evaluate:

• Total cost
• Repayment requirements
• Eligibility
• Duration
• Impact on cash flow
• Business requirements

Professional financial advice may also be appropriate when evaluating financing options.

Working capital for international businesses

International expansion can make working capital management more complicated.

A UK company might:

• Invoice customers across several countries
• Receive payments involving different currencies
• Purchase inventory internationally
• Pay overseas suppliers
• Operate across several markets
• Experience different payment cycles by region

Timing becomes particularly important.

If suppliers need to be paid before international customer invoices are collected, additional working capital can become tied up in the operating cycle.

At larger transaction volumes, finance teams therefore need to consider the connection between working capital, accounts receivable, payments and treasury operations.

Payment infrastructure can become an important part of this wider financial operation.

Where does Payoneer fit?

Payoneer can support eligible businesses with aspects of international payment operations that sit within the wider working capital cycle.

For example, businesses operating internationally can review Payoneer’s solutions for receiving eligible B2B payments and making eligible commercial payments across supported markets.

Relevant Payoneer resources include:

• Get Paid by Clients for eligible B2B payment requirements
• Payoneer for Business for wider international business payment requirements
• Payoneer Mass Payouts for appropriate higher volume payout use cases
• Payoneer working capital resources for further information
• Payoneer Capital Advance for current information about availability and eligibility

Payoneer Capital Advance is subject to eligibility and availability. Businesses should review the applicable terms and current product information before deciding whether a particular solution meets their requirements.

For larger businesses, the wider opportunity is to connect international payment processes with accounts receivable, accounts payable and treasury operations so finance teams have better visibility across the working capital cycle.

Working capital checklist for growing businesses

Finance teams reviewing working capital can ask:

• What are our current assets and current liabilities?
• How much working capital do we currently have?
• How quickly do customers pay?
• How much money is tied up in accounts receivable?
• How much capital is tied up in inventory?
• When do supplier payments become due?
• Are payment terms creating working capital gaps?
• How does seasonality affect requirements?
• How could planned growth change our working capital needs?
• How much manual work exists across receivables and payments?
• Can finance teams see incoming and outgoing payment activity clearly?
• How do international operations affect payment timing?

The answers can help identify where improvements may have the greatest impact.

Manage working capital for growth, not just today

Working capital isn’t only an accounting metric. It reflects how financial resources move through a business and how effectively the organisation can meet its short term commitments.

For larger companies, working capital can become increasingly interconnected with accounts receivable, inventory, supplier payments, international transactions and treasury operations.

Growth can make these relationships more important because businesses often need to commit resources before additional revenue arrives.

The objective should therefore be to understand where capital is tied up, improve visibility across incoming and outgoing payments and build financial processes capable of supporting higher transaction volumes.

UK businesses can find further independent information through the British Business Bank and UK Government guidance for company directors.

Eligible businesses with international payment requirements can also review Payoneer for Business and Payoneer’s working capital resources as part of their wider approach to managing international business operations.