What is working capital?

Working capital is your organisation’s financial breathing space. It shows which part of your current assets (such as inventory, receivables and cash) is available to pay your short-term liabilities. In other words: how do you determine working capital? It is the fuel that keeps your business running.

Healthy working capital ensures flexibility and stability in your daily operations. In this article, we explain exactly what working capital means, how you calculate it and how to improve it structurally.

Table of contents:

Calculating working capital: how does it work?

The calculation of working capital is simple: Working capital = Current assets – Current liabilities

So, you look at what you have (such as outstanding invoices from customers, stock, bank balances) and what you still have to pay within 12 months (for example to suppliers or the tax authorities).

Do you want to calculate net working capital? Then you use the same formula, but exclude items that are not directly available in the short term. Think of stock that is difficult to sell or doubtful debtors.

A positive outcome means you have enough resources to meet your short-term obligations. A negative working capital, on the other hand, may indicate potential liquidity problems.

Positive vs negative working capital

A positive working capital indicates that your business is financially healthy. You have sufficient liquidity to pay suppliers, wages and other short-term commitments. Companies with strong working capital can invest more quickly, grow, or absorb fluctuations in revenue.

Negative working capital is not always an immediate problem, for example in businesses with a high turnover rate (such as supermarkets). But often it is a sign that liquidity is under pressure. It may mean you are too dependent on postponed payments or that you are invoicing too late.

Working capital financing: what are your options?

If your working capital is too low, there are several forms of working capital financing. Consider the following:

• Factoring: selling your outstanding invoices to a third party.
• Bank credit: via a working capital credit line or business loan.
• Sale & leaseback: selling assets and renting them back.
• Accelerating debtor payments: for example, with Payt.

In many businesses, a large amount of working capital is “tied up” in outstanding invoices. In such cases, the first gains can often be made through better debtor management without the need for external financing.

How do you improve your working capital?

If you notice that your working capital needs improvement, there are several steps you can take:

• Optimise your stock: analyse which products sell well and which do not. Prevent money from being tied up in unsold inventory.
• Invoice on time: ensure an efficient invoicing process to receive payments more quickly.
• Check creditworthiness: reduce the risk of bad debt by checking the credit rating of new customers.
• Work with multiple suppliers: this increases your flexibility and continuity.
• Explore tax opportunities: investigate which tax schemes may help you balance your working capital.
• Create financial room: negotiate payment terms with suppliers to create more financial space.
• Pay faster in exchange for discounts: if you have positive working capital, you can pay suppliers more quickly in return for discounts.

Improving your working capital with Payt

A well-organised debtor process is the key to healthy working capital. With Payt, you automate the entire follow-up process of outstanding invoices, from friendly reminders to final notices. You maintain personal contact, but with a smart workflow in the background.

This way, Payt helps you improve your working capital:

• You get paid 30–50% faster
• You maintain good customer relationships through clear communication
• You gain real-time insight into your debtor position
• You collaborate more efficiently with your accounting package

In short: while your accounting shows the status of your working capital, Payt ensures you actively improve it. Curious about what Payt can do for you? Download our brochure below or schedule a demo right away.

Frequently asked questions