Concepts

Working capital

Working capital is the money available to run your business day to day, calculated as current assets such as cash and receivables minus current liabilities such as bills and GST payable.

Working capital is a measure of a business's short-term financial health. It is calculated by taking current assets, which are assets expected to convert to cash within about twelve months such as cash, accounts receivable and stock, and subtracting current liabilities, which are obligations due within that time such as accounts payable, tax amounts and short-term loan repayments. A positive figure suggests the business can meet its near-term obligations.

The concept matters because day-to-day operations need funding before sales turn into cash. A business buys stock, pays wages and rent, and then waits for customers to pay. Working capital is the buffer that bridges that gap. When growth is rapid, working capital needs often rise, because more stock and more customer credit are tied up. Many fast-growing businesses face cash pressure even while they are profitable.

GST affects working capital in practical ways. GST collected from customers but not yet paid to the ATO is a current liability, so it should not be counted as spare cash. GST credits owed back to you are a current asset. Similarly, amounts owing under PAYG withholding and superannuation belong in current liabilities. Including these items in your calculation gives a realistic view of what money is actually available to use.

There are several ways to improve working capital. You can collect from customers faster by invoicing promptly and following up overdue accounts, negotiate longer terms with suppliers, reduce excess stock, and avoid using short-term funds for long-term assets. Equipment purchased with short-term cash, for example, can leave the business without enough funds for wages. Matching the term of funding to the life of the asset is a sound approach.

Lenders and advisers often look at the working capital ratio, which compares current assets to current liabilities. A ratio above one indicates that current assets exceed current liabilities. What is considered healthy varies by industry. A cafe with fast cash sales might operate comfortably on a lower ratio than a wholesaler with long customer payment terms. Your accountant can help you set a sensible target for your business.

A common misunderstanding is treating the bank balance as working capital without considering what is owed. A large balance might be mostly committed to a GST payment, a tax bill and supplier invoices. Another is confusing working capital with profit or with long-term capital. A regular review of upcoming obligations, aligned with your BAS and tax dates, helps. This is general information only, so confirm your position with the ATO or a registered tax professional.

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