Cashflow is one of the clearest indicators of business health, but it is not the only number owners should be watching. Working capital gives you a practical view of whether your business has enough short-term resources to cover its day-to-day commitments, manage slower periods and support future growth.
Regularly reviewing your working capital can help you make better decisions before cash becomes tight. It can also highlight areas where money is being held up, such as unpaid invoices, excess stock, work in progress or upcoming tax obligations.
What is working capital?
Working capital is the difference between your current assets and your current liabilities. In simple terms, it shows whether your business has enough short-term assets available to meet short-term obligations.
Your current assets may include cash, debtors, stock and work in progress. Your current liabilities may include creditors, tax amounts owing, short-term loans or other amounts due soon.
A positive working capital position gives your business more room to move. It can help you cover expenses, manage changes in sales, fund growth opportunities and respond to unexpected challenges without needing to sell assets, borrow more or contribute additional personal funds.
To calculate working capital, use the following formula:
Cash + debtors + stock + work in progress – creditors – taxes owing = working capital
For example, if your business had the following balances:
- Cash: $150,000
- Debtors: $120,000
- Stock: $100,000
- Creditors: $45,000
- Taxes owing: $25,000
Your working capital would be $300,000.
$150,000 + $120,000 + $100,000 – $45,000 – $25,000 = $300,000
If the same business had an overdraft of $150,000 instead of a positive cash balance, the working capital position would reduce to zero. This means the business may not have enough short-term resources available if debtor payments slow down, sales reduce or stock levels increase.
In more serious situations, a weak working capital position can also raise concerns about whether the business can meet its debts as and when they fall due. If this applies to your business, it is important to seek advice early.
Ways to improve your working capital
If your working capital is lower than it should be, there are practical steps you can take. The right approach will depend on your business structure, industry, cashflow cycle and current obligations.
1. Build a cash buffer
A useful starting point is to build enough cash to cover at least two months of sales value. This gives your business more breathing room if trading slows, customers take longer to pay or unexpected costs arise.
To work out a target amount, review your average monthly sales over the past six months. From there, you can create a cash buffer goal and adjust spending where needed to gradually build towards it.
2. Review your debt structure
If your business relies on an overdraft, it may be worth reviewing whether part of that debt could be restructured into a term loan. This can provide more certainty around repayments and may help reduce pressure on day-to-day cashflow.
Before making changes, speak with your bank or finance provider. We can also work with you to review your numbers and help you understand what finance options may suit your business.
3. Talk to your suppliers
Supplier terms can make a meaningful difference to working capital. Depending on your relationship and trading history, you may be able to negotiate longer payment terms, early payment discounts or more flexible arrangements.
The aim is to reach an agreement that supports both sides. A clear and respectful conversation with suppliers can often create a better outcome than waiting until cashflow becomes tight.
4. Set aside money for tax
Tax obligations can place pressure on cashflow if they are not planned for throughout the year. One practical option is to set aside a percentage of sales into a separate bank account so funds are available when BAS, GST, PAYG or income tax payments fall due.
This approach helps reduce surprises and gives you a clearer view of the cash that is truly available for operating expenses and business decisions.
5. Consider whether additional funds are needed
If the steps above are not enough to improve working capital, the business may need additional funding. This could involve contributing owner funds, reviewing lending options or making broader changes to the business model.
Before injecting funds, it is important to understand why the working capital gap exists. Additional money may provide short-term relief, but the underlying issue still needs to be addressed.
Keep working capital on your regular review list
Working capital is not a once-a-year calculation. It should be reviewed regularly as part of your broader business planning and cashflow management.
A consistent review can help you identify pressure points early, make more informed decisions and improve your ability to respond to changing conditions.
If you would like help calculating your working capital position or identifying ways to improve cashflow, our team can work with you to review your numbers and create practical next steps for your business.
