Manage working capital and business spending
Calculate working capital, manage trade receivables and payables, and distinguish capital expenditure from revenue expenditure.
Section 5.1 · Business finance
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 5.1.2. Cambridge states that both current versions have no significant changes affecting teaching. This lesson maps only its named section; other sections and full paper practice remain separate. Written practice is self-checked
Before you begin
- No previous business course is assumed. Use the lesson's definitions before applying them to the business context.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is working capital calculated?
What you will learn
- Explain working capital and calculate its value
- Assess management of receivables and payables
- Distinguish capital and revenue expenditure
Working capital funds day-to-day activity
Working capital is current assets minus current liabilities. Current assets can include cash, inventory and trade receivables; current liabilities can include trade payables and short-term obligations. It helps a business pay bills while operations continue.
Too little working capital can create liquidity pressure. Excessive inventory or slow collection can tie up cash. A business can review credit control, invoice accuracy, customer terms, stock management and supplier payment dates, while keeping supplier relationships and customer service in view.
Spending can be classified by its purpose
Capital expenditure buys or improves a non-current asset intended to support operations over time, such as equipment or a building. Revenue expenditure covers recurring operating costs such as wages, utilities, routine repairs or materials.
Trade receivables are amounts customers owe the business; trade payables are amounts the business owes suppliers. Faster collection can improve cash availability, while extending payment to suppliers may help cash temporarily but damage trust or supply reliability if terms are ignored.
Pause and explain
A firm has current assets of $40,000 and current liabilities of $27,000. What is working capital?
Worked example
A retailer has current assets of $86,000 and current liabilities of $54,000. Calculate working capital and identify one action that could improve cash timing.
Show the worked solution
- Use working capital = current assets−current liabilities.
- Subtract 54,000 from 86,000.
- Suggest a cash-timing action without assuming it changes profit by the same amount.
Answer Working capital is $32,000. The retailer might issue accurate invoices promptly and follow up overdue customer accounts; the effect depends on whether customers pay sooner and on the terms agreed.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A wholesaler has inventory $18,000, receivables $22,000, cash $6,000 and payables $31,000. Calculate working capital.
Give me a hint
Add the current assets, then subtract current liabilities.
Compare my reasoning
- Current assets total 18,000+22,000+6,000.
- Subtract trade payables of 31,000.
- Label the result as working capital, not profit.
Current assets are $46,000. Working capital is $46,000−$31,000=$15,000.
Look for these in your work
- Assets are correctly totalled
- Liabilities are subtracted
- Result is labelled correctly
A small retailer is paid by customers 45 days after sale but must pay suppliers in 20 days. Explain one working-capital pressure and a response to consider.
Give me a hint
Compare the cash-conversion timing and choose a response consistent with agreed terms.
Compare my reasoning
- The business pays suppliers before it receives customer cash.
- Late customer receipts can widen the funding gap.
- Review credit checks, invoice timing or negotiated supplier terms.
The retailer may need to fund 25 days between paying suppliers and collecting customer cash. It could improve credit checks and invoice promptly, or negotiate more suitable supplier terms; simply paying suppliers late without agreement risks trust and supply.
Look for these in your work
- Payment timing is compared
- A cash-funding effect is explained
- A practical and responsible response is proposed
A shop buys a delivery van for $28,000 and pays $900 monthly for fuel and routine servicing. Classify the two spending types and explain the distinction.
Give me a hint
Classify the vehicle by its lasting use and the recurring costs by operating period.
Compare my reasoning
- The van is a long-lived non-current asset.
- Fuel and routine servicing support current operations.
- Explain that purchase price and recurring expenses have different purposes.
The van purchase is capital expenditure because it buys a non-current asset used over several years. Fuel and routine servicing are revenue expenditure because they are recurring operating costs of using and maintaining the van.
Look for these in your work
- Both types are classified
- Asset life and recurring use distinguish them
- Examples support the distinction
Common mistakes
- Reversing current assets and current liabilities
- Calling all purchases revenue expenditure
- Improving supplier payment timing by ignoring agreed terms
What can you explain now?
How is working capital calculated?
Compare with the explanation
Current assets minus current liabilities
This estimates the net current resources available for day-to-day obligations.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do working capital, receivables, payables and the capital/revenue spending distinction inform cash management?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.