Question 1

What is working capital, and why does it matter so much?

Accepted Answer

**Working capital** is the money tied up in running the business day to day — current assets minus current liabilities. It matters because it is where cash goes to hide.

**What is in it:**

**Stock (inventory)** — cash converted into things sitting on a shelf.

**Receivables (debtors)** — work done, invoiced, and not yet paid for. Cash you have earned and do not have.

**Payables (creditors)** — money you owe suppliers. Effectively an interest-free loan from them, which is why it **reduces** your working capital requirement.

**The cash conversion cycle.** The number of days between paying for something and being paid for it:

**Days inventory outstanding** — how long stock sits.

**Plus days sales outstanding** — how long customers take to pay.

**Minus days payable outstanding** — how long you take to pay suppliers.

The result is how many days of operating costs you must fund from your own money. **Shortening it releases cash without selling anything more.**

**Why it explains so many failures.** Growth increases every component: more stock, more customers owing you money. **Working capital requirement scales with revenue**, so doubling sales can double the cash trapped in the business — precisely when you are least able to spare it.

**Some businesses have negative working capital**, and it is a powerful advantage. Supermarkets and subscription businesses collect from customers **before** paying suppliers, so growth **generates** cash rather than consuming it. This is a structural feature worth understanding when comparing business models.

**What actually improves it:**

**Invoice promptly.** A surprising proportion of late payment begins with late invoicing.

**Shorten payment terms**, and enforce them — chasing is not rude, it is the job.

**Take deposits or stage payments**, which is the single largest lever for service businesses.

**Reduce stock holding**, without creating stockouts.

**Negotiate supplier terms**, and use the full period offered.

**Invoice finance and overdrafts** bridge the gap at a cost, and are a symptom rather than a solution if permanently required.

General information, not financial advice.

Question 2

How does inventory tie up cash, and what does that cost you?

Accepted Answer

Stock is cash converted into a form you cannot spend, and the cost of holding it is consistently larger than businesses estimate — commonly a fifth to a third of the stock's value per year once every

Question 3

How do you buy an existing business, and what should you check?

Accepted Answer

Through a structured process — identify, value, offer subject to due diligence, investigate, negotiate, complete — and the investigation stage is where the real work is, because what you are buying

Question 4

What is the difference between cash and accrual accounting?

Accepted Answer

When a transaction is recorded. Cash accounting records it when money moves; accrual accounting records it when the economic event happens, regardless of payment. Cash basis. Income is recorded when

Question 5

What is invoice finance, and what does factoring actually cost?

Accepted Answer

Borrowing against money customers already owe you — releasing cash from unpaid invoices rather than waiting for payment terms to run. It solves a genuine problem for growing businesses and is

Question 6

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 7

What do the three financial statements actually tell you?

Accepted Answer

Each answers a different question, and reading any one alone gives a misleading picture — which is exactly why there are three. The profit and loss account (income statement). Did we make money over

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