What is working capital? When accountants use it they are referring to “Net Current Assets” which are your companies short term assets less your short term liabilities.
To make this easy let’s assume that you have £1,000 of stock, you are owed £500 by your customers and you have £200 in the till. This means that your short term assets are £1,700, unfortunately at the same time you have £1,000 of bills to pay, which are described as your Short Term Liabilities.
Therefore your working capital, or your Net Current Assets, are £1,700 less £1,000 = £700.
Naturally, you would assume that the more working capital you have in your company the safer your company is, but this is not always true. If too much of that working capital is in stock, it is dead money; which comes alive when sold and then can be used to buy new stock.
Recently a large furniture retailer went into liquidation even though it had no major debts, because all its money was in furniture and no one was buying their furniture, this led to a major cash flow crisis and its eventual demise.
So you must look where your cash is and whether it is working for you. This is why before Christmas all the major retail chains were giving such big discounts, as it is no good having money in stock, if you don’t have cash to pay your staff and your regular bills.
The message is, if your stock isn’t selling, sell it at any price and use that money to buy stock that will sell.