How to calculate your working capital requirement

A permanent need, not a passing lag

People often assume working capital sorts itself out, since customers pay in the end. That holds for one invoice, but not for the business. As long as trading continues, new receivables replace those you collect.

The need therefore stays structural. Fund it from stable resources, such as equity, a shareholder loan or medium-term credit, just like an investment. In contrast, an overdraft makes it ruinous.

Working capital grows with revenue

Doubling your activity doubles your working capital requirement. That is the paradox of growth. The more the business sells, the more cash it needs. As a result, fast unfunded growth can end in insolvency with a full order book.

The calculator shows what the requirement becomes if revenue doubles. Run that check before you accept a large contract.

Levers, from strongest to weakest

Customer payment terms remain by far the strongest lever. The calculator shows the cash freed by collecting fifteen days earlier. For example, ask for a deposit, invoice at once or offer direct debit.

Next comes inventory turnover. Finally, negotiate supplier terms, although a young company with no track record rarely obtains them.

Where working capital sits in a financial plan

It belongs in the funding plan, next to investments. It also appears month by month in the cash flow plan. Otherwise, the plan overstates available cash every time.

The inputs the calculator needs

Enter annual revenue and annual purchases, both excluding VAT. Then give customer and supplier payment terms in days. Finally, add inventory turnover and the VAT rate. The calculator converts each flow into an amount and adds them up. Also test a pessimistic case with slower customers.