Working capital is the difference between a business's current assets and its current liabilities. It measures the short-term financial cushion available to fund day-to-day operations - whether the business can cover what it owes in the next twelve months with what it expects to realise in cash over the same period.
What it means
Positive working capital means current assets exceed current liabilities, so the business can meet its near-term obligations. Negative working capital signals potential liquidity strain. The figure is driven by how quickly debtors pay, how much stock is held, and how soon creditors and other current liabilities fall due.
Where it fits in
Payroll is one of the most regular, non-negotiable current obligations a business faces. Sufficient working capital is what ensures the cash is there to pay staff and settle the PAYE, UIF and SDL due each cycle. A working-capital squeeze shows up first as difficulty meeting the wage run.
Key rules
- Working capital equals current assets less current liabilities.
- Positive working capital indicates short-term liquidity; negative signals strain.
- Driven by debtor, inventory and creditor balances.
- Must be enough to cover the recurring payroll and statutory obligations.
