Calculate and manage working capital
Calculate working capital and explain how timing between current assets and current liabilities affects daily operations.
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
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
- Define working capital
- Calculate working capital from current assets and liabilities
- Explain why positive cash flow timing matters
Working capital funds day-to-day activity
Working capital = current assets − current liabilities. Current assets include inventory, trade receivables and cash; current liabilities include amounts due soon, such as trade payables or an overdraft.
A business may report positive working capital but still face a cash shortage if much of its current assets are slow-moving inventory or overdue receivables. The composition and timing matter, not just the total.
Balance availability and cost
Too little working capital can make it difficult to pay suppliers, wages or other bills when due. Holding too much in inventory or idle cash can also tie up funds that could be used elsewhere.
Management can monitor stock, collect receivables on time and negotiate supplier terms. These actions affect relationships and service, so changes should fit the business and its customers.
Pause and explain
Why can a business with positive working capital still have a cash problem?
Worked example
A business has current assets of $42,000 and current liabilities of $31,000. Calculate working capital and give one limitation of the result.
Show the worked solution
- Use current assets minus current liabilities.
- 42,000 − 31,000 = 11,000.
- Interpret the amount alongside asset quality and payment dates.
Answer Working capital is $11,000. This positive figure does not prove that bills can be paid on time: inventory may be difficult to sell and receivables may arrive after liabilities fall due.
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 $16,000, receivables $9,000 and cash $5,000. Current liabilities are $24,000. Calculate working capital and show the totals.
Give me a hint
Add current assets first, then subtract current liabilities.
Compare my reasoning
- Current assets = 16,000 + 9,000 + 5,000.
- Current assets total $30,000.
- 30,000 − 24,000 = 6,000.
Working capital = $30,000 − $24,000 = $6,000. The wholesaler has positive working capital, but it should also check whether inventory sells and customers pay before liabilities are due.
Look for these in your work
- Assets total correct
- Formula applied
- Interpretation qualified
A retailer's working capital falls from $20,000 to $8,000. State what the calculation tells you and two checks before concluding that payment risk has worsened.
Give me a hint
The total alone does not show which balance changed or when cash is due.
Compare my reasoning
- The net of current assets and current liabilities is $12,000 lower.
- Check whether inventory or receivables make up the assets.
- Check liability due dates and recent cash receipts.
The net working-capital balance has fallen by $12,000. Before concluding that payment risk has worsened, check the liquidity and ageing of inventory and receivables, and compare cash receipts with liability due dates.
Look for these in your work
- Change calculated
- Asset quality checked
- Payment timing checked
A café holds more ingredients than it sells each week while suppliers are due in ten days. Recommend one working-capital action and explain a risk.
Give me a hint
Consider inventory tied up in cash, while protecting availability and food safety.
Compare my reasoning
- Review sales and ingredient usage before reordering.
- Reduce excess stock where safe and practical.
- Check that lower stock will not cause shortages or waste elsewhere.
The café could align orders with sales and delivery lead times to reduce cash tied up in excess inventory. It must preserve enough safe stock to meet demand; cutting inventory too far could cause shortages or lost sales.
Look for these in your work
- Practical action
- Cash effect explained
- Service or safety risk included
Common mistakes
- Subtracting current assets from current liabilities
- Treating working capital as the same as cash
- Assuming a positive figure guarantees liquidity
What can you explain now?
How is working capital calculated?
Compare with the explanation
Current assets minus current liabilities
This is the syllabus formula.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What is the difference between working capital and cash?
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.