How to calculate your working capital requirement

Step 1 — understand what you're measuring

Your working capital requirement is the cash locked in the trading cycle at any point: money owed to you by customers (debtors), plus money tied up in stock, minus money you owe suppliers (creditors) that funds part of it. It is the practical, pounds-and-pence face of the cash conversion cycle. Knowing it tells you how much cash your business needs simply to keep trading at its current level.

Step 2 — gather your figures

From your accounts, take your average debtors (or annual sales times debtor days over 365), your average stock value, and your average creditors (or annual purchases times creditor days over 365). Use recent, representative figures — a full trading cycle if your business is seasonal, so you capture the peak need, not a quiet-month snapshot.

Step 3 — do the calculation

Working capital requirement equals debtors plus stock minus creditors. If customers owe you £80k, you hold £40k of stock, and you owe suppliers £50k, your requirement is £70k — the cash your trading cycle ties up that you must fund from your own resources or a facility. The working capital calculator does this for you.

Step 4 — account for growth and seasonality

Your requirement is not static. Grow sales and it rises — more debtors and stock to fund. Hit a seasonal peak and it spikes. Model your requirement at the levels you expect to trade at, not just today, so a facility sized to it will still fit when you are busiest. This is how you avoid the overtrading trap. See cash flow during rapid growth.