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HMRC internal manual

Holding and Movements Alcohol Strategy - Credibility

Ratio Analysis: What do we mean by Working Capital and Liquidity?


Working Capital is the capital available for conducting the day-to-day operations of a business, normally the excess of current assets over current liabilities.

Every business needs adequate liquid resources to maintain day-to-day cash flow. The word liquid means readily converted to cash and a business’ liquidity is its ability to convert its assets into cash to meet all the demands for payments when they fall due. Liquid assets are the current assets made up as follows:

  • cash, (the majority);
  • debtors, who are normally expected to pay their bills in the near future; and
  • stock is the least liquid of current assets because it must be sold and the customers are then given a period of credit before they are required to make payment that can be used to pay creditors (cash sales shorten this process).