Cory Mayfield
Last Updated:
12 August 2025
4
min read
What you'll learn:
What working capital is and why it's critical for Australian businesses
How to calculate working capital using simple formulas
Proven strategies to improve cash flow and avoid common pitfalls
Industry-specific tips for better working capital management
Sarah runs a successful Melbourne catering business, but last month she nearly couldn't pay her suppliers despite having a full restaurant every day. The problem? Her working capital was tied up in slow-paying corporate catering clients, leaving her cash-strapped when bills came due.
Sarah's situation isn't unique. Research by Xero and Accenture shows that 92% of Australian small businesses experience at least one month of negative cash flow each year. Recent CommBank research found that nearly 80% of Australian SMEs experienced cash flow impacts in the past 12 months.
Working capital management is the difference between thriving and merely surviving in business. Get it right, and you'll have the financial flexibility to seize opportunities and weather storms. Get it wrong, and even profitable businesses like Sarah's can find themselves scrambling to pay basic expenses.
What is working capital? The foundation of cash flow success
Working capital is simply the money available to run your business day-to-day. Think of it as your financial breathing room—the buffer between what you own and what you owe in the short term.
The basic working capital formula is:
Working Capital = Current Assets - Current Liabilities
Your current assets include:
Cash in the bank
Money customers owe you (accounts receivable)
Inventory you can sell within 12 months
Prepaid expenses like insurance
Your current liabilities include:
Money you owe suppliers (accounts payable)
Short-term loans and credit lines
Wages and expenses you haven't paid yet
When Sarah calculated her catering business' working capital, she discovered the problem. Despite having $45,000 in unpaid invoices from catering clients (current assets), she owed $52,000 in immediate bills (current liabilities). Her working capital was -$7,000, explaining why she felt constantly cash-strapped.
Research by CreditorWatch found that only 61% of Australian small businesses are satisfied with their current working capital levels, compared to 88% of large businesses. This highlights why working capital management is particularly critical for smaller enterprises.
How to calculate working capital: Your step-by-step guide
Calculating your working capital takes just a few minutes but gives you crucial insight into your business's financial health. Here's how to do it:
Step 1: List your current assets
Pull up your latest balance sheet and add up everything you can convert to cash within 12 months:
Example calculation:
Bank account: $15,000
Outstanding invoices: $35,000
Inventory: $25,000
Prepaid rent: $3,000
Total current assets: $78,000
Step 2: List your current liabilities
Add up everything you need to pay within 12 months:
Supplier bills: $18,000
Credit card debt: $8,000
Payroll owing: $12,000
Short-term loan: $15,000
Total current liabilities: $53,000
Step 3: Apply the working capital formula
Working Capital = $78,000 - $53,000 = $25,000
This positive result means you have $25,000 in short-term financial flexibility—a healthy buffer for most small businesses.
Understanding your working capital ratio
Beyond the dollar amount, calculate your current ratio: Current Ratio = Current Assets ÷ Current Liabilities
Using our example: $78,000 ÷ $53,000 = 1.47
A ratio between 1.2 and 2.0 is generally healthy, though this varies by industry. Below 1.0 suggests potential cash flow problems, while above 3.0 might indicate you're not using your assets efficiently.
The quick wins: Immediate cash flow management strategies
Before diving into complex working capital strategies, here are three quick actions that can improve your cash flow within 30 days:
1. Speed up customer payments
Late payments are killing Australian small businesses. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) reports that payment disputes now account for 42% of assistance requests—up from 36% last year.
Immediate actions:
Send invoices the same day you deliver goods or services
Follow up on overdue accounts weekly, not monthly
Offer 2% discount for payments within 10 days
Switch to electronic payments instead of cheques
Take David's Newcastle construction business. He was waiting 60+ days for payments until he implemented weekly follow-ups and early payment discounts. His average collection time dropped to 35 days, freeing up $40,000 in working capital.
2. Negotiate better supplier terms
Your accounts payable are a free source of short-term financing when managed strategically.
Smart payment strategies:
Ask suppliers for 60-day terms instead of 30
Pay electronically to better control timing
Take advantage of early payment discounts only when your cash flow is strong
Prioritise payments to critical suppliers first
3. Optimise your inventory
Excess inventory is cash sitting on shelves earning nothing. Australian businesses often tie up too much working capital in slow-moving stock.
Quick inventory wins:
Identify products that haven't sold in 90+ days
Run promotions to clear slow-moving stock
Negotiate consignment arrangements with key suppliers
Use just-in-time ordering for non-critical items
Advanced working capital management techniques
Once you've implemented the quick wins, these advanced strategies can significantly improve your working capital position:
Strategic accounts receivable management
Your outstanding invoices are a major component of working capital. The faster you collect, the more cash you have available.
Credit policy essentials:
Conduct credit checks on new customers over $5,000
Set clear payment terms (30 days maximum for most industries)
Monitor accounts receivable aging weekly
Consider factoring for immediate cash on large invoices
Technology solutions:
Automated invoicing systems that send reminders
Online payment options for faster collection
Integration between your accounting software and payment systems
Inventory optimisation strategies
Smart inventory management can free up significant working capital without impacting sales.
Advanced techniques:
ABC analysis: Focus on your top 20% of products that drive 80% of revenue
Demand forecasting using historical sales data
Vendor-managed inventory for high-volume items
Dropshipping arrangements for specialty products
Seasonal considerations: Given that 27% of Australian SMEs cite seasonal fluctuations as a major cash flow impact, plan your inventory around your business cycles. Build stock before peak seasons but reduce inventory during slow periods.
Accounts payable optimisation
Strategic use of payment terms can significantly improve your cash flow timing.
Advanced payment strategies:
Establish credit lines before you need them
Use business credit cards for short-term financing (if managed carefully)
Schedule payments to align with your cash flow cycles
Build strong relationships with key suppliers for payment flexibility
Common working capital mistakes that kill cash flow
Understanding these pitfalls helps prevent costly errors that contribute to Australia's challenging business environment, where an average small business experiences 4.2 months of negative cash flow annually according to Xero research:
Mistake 1: Ignoring cash flow forecasting
Many business owners only look at their bank balance, not their future cash needs.
The solution: Create a 13-week rolling cash flow forecast that shows when money comes in and goes out. Update it weekly to spot problems before they hit.
Mistake 2: Growing too fast without cash reserves
Rapid growth can actually kill businesses through cash flow strain—what accountants call "overtrading."
The solution: Ensure you have enough working capital to fund growth. A good rule of thumb is having 2-3 months of expenses in reserve before expanding aggressively.
Mistake 3: Relying on one major customer
If your biggest customer represents more than 20% of revenue, you're vulnerable to cash flow disasters.
The solution: Diversify your customer base and consider credit insurance for large accounts. The ASBFEO reports increased requests from businesses worried about customers becoming insolvent.
Industry-specific working capital challenges in Australia
Different industries face unique working capital challenges in the Australian market:
Construction and trades
Construction accounts for the highest number of payment disputes reported to the ASBFEO. Rising costs, project delays, and late payments create substantial working capital challenges.
Specific strategies:
Use progress billing to improve cash flow timing
Negotiate retention terms that don't exceed 5%
Consider construction-specific financing options
Build strong relationships with subcontractors for payment flexibility
Hospitality and retail
The hospitality sector has seen payment disputes triple over the past 12 months, often due to customers' inability to pay rather than unwillingness.
Specific strategies:
Implement robust seasonal cash flow planning
Diversify revenue streams beyond core business
Negotiate flexible supplier terms for seasonal fluctuations
Use technology to optimise inventory turnover
Professional services
Service businesses generally have lower working capital requirements but face unique challenges around timing of payments.
Specific strategies:
Implement retainer or subscription models for predictable cash flow
Use project-based billing rather than time and materials
Consider payment plans for large projects
Automate invoicing and follow-up processes
Technology tools for better working capital management
Modern Australian businesses leverage technology to optimise working capital:
Cash flow forecasting software
Accurate forecasting prevents cash flow surprises and helps you plan for growth.
Recommended features:
Integration with your accounting software
Automated bank feeds for real-time data
Scenario planning for different business conditions
Mobile access for on-the-go monitoring
Automated payment systems
Streamline your payment processes to improve cash flow timing and reduce administrative burden.
Key capabilities:
Electronic invoicing with payment links
Automated payment reminders
Multiple payment options for customers
Integration with your accounting system
Business intelligence dashboards
Get real-time insights into your working capital performance with dashboard reporting.
Essential metrics to track:
Days sales outstanding (how quickly you collect)
Days inventory outstanding (how fast you sell stock)
Days payable outstanding (how long you take to pay suppliers)
Cash conversion cycle (the overall efficiency of your working capital)
Measuring your working capital performance
Track these key metrics to monitor your working capital effectiveness:
Days Sales Outstanding (DSO)
Formula: (Accounts Receivable ÷ Daily Sales)
This measures how quickly you collect money from customers. Lower is better—aim for under 45 days in most industries.
Days Inventory Outstanding (DIO)
Formula: (Average Inventory ÷ Daily Cost of Goods Sold)
This shows how long inventory sits before sale. Retail businesses should aim for 30-90 days depending on product type.
Cash Conversion Cycle
Formula: DSO + DIO - DPO
This combines all three measures to show how efficiently you manage working capital. A shorter cycle means better cash flow.
Australian businesses should benchmark these metrics against industry standards. The ASBFEO provides industry-specific guidance that can help you set realistic targets.
Building your working capital improvement plan
Create a systematic approach to working capital optimisation:
Phase 1: Assessment (Week 1)
Calculate your current working capital position
Analyse cash flow patterns over the past 12 months
Identify your biggest working capital challenges
Benchmark against industry standards
Phase 2: Quick wins (Weeks 2-4)
Implement faster invoicing and follow-up processes
Negotiate improved payment terms with key suppliers
Clear slow-moving inventory through promotions
Set up basic cash flow forecasting
Phase 3: Advanced strategies (Months 2-3)
Develop comprehensive credit policies
Implement inventory management systems
Establish lines of credit before you need them
Create detailed cash flow forecasting
Phase 4: Ongoing optimisation (Ongoing)
Review working capital metrics monthly
Adjust strategies based on seasonal patterns
Continuously improve processes and systems
Plan for growth scenarios
When to seek professional help
Consider working with financial professionals when:
Your business consistently struggles with negative cash flow
You're planning significant growth or expansion
Your industry faces unique working capital challenges
You lack the time or expertise to implement complex strategies
The ASBFEO offers free assistance for small businesses facing payment disputes or cash flow challenges. Don't wait until problems become critical—early intervention can save your business.
Transform your working capital management today
Effective working capital management isn't just about survival—it's about creating the financial foundation for growth and success. With Australian small businesses contributing 33% of GDP and employing 5.36 million people, proper cash flow management isn't just important for individual businesses—it's vital for the entire economy.
The Australian business environment presents unique challenges, from late payment cultures to seasonal fluctuations and industry-specific pressures. But with the right strategies and tools, you can turn working capital from a constant worry into a competitive advantage.
Start with the quick wins—faster invoicing, better supplier terms, and inventory optimisation. Then build towards more sophisticated cash flow forecasting and automated systems. Remember, working capital management is an ongoing process that requires regular attention and adjustment.
Ready to take control of your cash flow? Begin by calculating your current working capital position using the formulas provided. Then implement the strategies that best fit your industry and business model.
For businesses looking to improve cash flow immediately, Chargetree offers automated payment collection that can transform how you manage payments. When you can reduce late payments by over 50% and access your working capital weeks sooner through partial payments, your cash flow position improves dramatically. Create your free account today and experience how faster payments can revolutionise your working capital management.
FAQs
What is a good working capital ratio for Australian small businesses?
A working capital ratio between 1.2 and 2.0 is generally healthy for most Australian small businesses. However, this varies by industry—retail businesses often operate with lower ratios due to fast inventory turnover, while service businesses might maintain higher ratios.
How often should I calculate my working capital?
Calculate working capital monthly as part of your regular financial review. This helps you identify trends and address issues before they become critical. During busy periods or when experiencing rapid growth, weekly calculations are recommended.
Can working capital be negative?
Yes, negative working capital means current liabilities exceed current assets. While this can indicate cash flow problems, some businesses with rapid inventory turnover (like supermarkets) operate successfully with negative working capital. However, for most Australian SMEs, negative working capital is a warning sign that needs attention.
How does the Australian business environment affect working capital?
Australian small businesses face unique challenges including a culture of late payments, seasonal variations, and industry-specific pressures. The ASBFEO reports that payment disputes are now the most common issue facing Australian SMEs, with construction and hospitality particularly affected.
What's the difference between working capital and cash flow?
Working capital is a snapshot of your short-term financial position at a specific point in time—what you own minus what you owe. Cash flow measures the actual movement of money in and out of your business over a period. You can have positive working capital but negative cash flow if customers pay slowly.
How can technology help with working capital management?
Technology automates many working capital processes, from invoicing and collections to inventory management and cash flow forecasting. This reduces errors, saves time, and provides real-time visibility into your financial position. Modern cloud-based systems can integrate all aspects of working capital management.
What government resources are available for Australian small businesses struggling with working capital?
The ASBFEO provides free assistance for payment disputes and cash flow challenges. The Australian Tax Office offers payment plans for tax obligations, and various state governments provide small business support services. Additionally, the Small Business Debt Helpline offers confidential financial counselling.
