‘W’ is for working capital

The building blocks of accountancy

is for working capital

Our A-Z of top tips continues with ‘W’. Julia Burn reports.



Working capital, also known as a company’s liquidity or net current assets, is a calculation to show how well a firm can cover its short-term liabilities as they fall due.

The calculation is current assets, which includes items such as cash and cash equivalents, stock and work in progress, and current assets – trade debtors, other debtors and prepayments and accrued income – less current liabilities such as trade creditors, amounts due to HM Revenune and Customs for PAYE, National Insurance and corporation tax accruals and deferred income.  

For most companies, it is desirable for the net current assets to be positive. 

Tight rein

To achieve this, they need to manage their short-term assets and liabilities efficiently. This could be as simple as keeping a tight reign on trade debtors and stock to ensure cash is not tied up for long periods. 

It is also good to try, where possible, to match supplier payment terms with the terms given to customers so that the cash flows remain in the same periods.

For a medical practice, managing working capital will mainly revolve around ensuring that stocks of equipment and medicines are kept to a minimal level without compromising the service you provide your clients. 

The other important factor, especially in the current post-Covid environment, is to manage cash. This will include recovering trade debtors as quickly after providing the service as possible as well as negotiating as favourable payment terms as possible with suppliers.

There may also be the need to manage payment terms for procedures or treatment plans that span over a long period of time and are classified as work in progress.

This can be done by, maybe, agreeing payment arrangements to ensure clients pay piecemeal to avoid long waiting time for payments compared with when the treatment is actually delivered. 

Government packages

The pandemic has really squeezed cash flows for businesses and consumers alike, and many businesses and individuals have had to rely on Government support packages to be able to manage their finances. 

This may have involved loans, grants, furlough for employees and deferral of tax liabilities, some of which will need to be repaid.

Clients may therefore seek to stretch payment terms or agree payment plans with you and these need to be considered very carefully. 

It will inevitably take a long time for the economy to recover, but there does seem to be light at the end of the tunnel.

Timely reporting

The most important part of managing a business’s working capital is timely reporting, especially in the current climate where quick decisions may need to be made. 

Updating book-keeping records is a major part of this and most accountants offer an outsourcing solution to assist with this, often taking on the back office for a company so that you can concentrate on what you do best, delivering outstanding service to your clients. 

Preparing budgets and cash flows is also likely to be necessary in the current climate. These need to be as accurate and timely as possible and regularly reviewed and flexed to ensure they are giving as true review of the business as possible. Your accountant should be able to assist with this. 

Consideration also needs to be made of the practice’s current circumstances. 

If some of your key people are considering moving on, retiring or selling up, they will need the business to look as healthy as possible. 

This again could be another reason to ensure that the working capital of the business is as liquid as possible so that current assets significantly cover current liabilities. 

Along with the profits of a business, working capital requirements can also be a major consideration when valuing a business.

The working capital of a business is important and needs to be well managed at all times.

Julia Burn (right) is a director at Blick Rothenberg and part of the team that advises medical practitioners