Working capital is the cash tied up running your business day to day: debtors, plus stock and work in progress, less what you owe suppliers. It is money you have already spent but not yet collected. Shortening the time cash spends in that cycle releases funds into your bank account without a single extra sale.

Almost every business owner who has ever asked “we made a profit, so where is the money?” is asking a working capital question. The profit is real. It is just sitting in someone else’s bank account, or on a shelf, or in a half finished job.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This article shows you how to measure the cash trapped in your business, work out what it is costing you, and release a meaningful amount of it within a quarter.

What Working Capital Is and How to Calculate It

Net working capital is current assets less current liabilities. For most trading businesses the operating version that matters is simpler still: debtors, plus inventory and work in progress, less trade creditors. That figure is the amount of your own money permanently locked into running the business, and it has to be funded by profits, by the owner, or by the bank.

Two things follow from that definition. First, working capital is not profit and it is not on your profit and loss statement. It lives on the balance sheet, which is precisely why owners who only ever read the profit and loss are blindsided by it. Second, it grows with sales. Double your revenue and, unless something else changes, you roughly double the cash locked up.

People often ask about the working capital ratio, which is current assets divided by current liabilities. It is a useful solvency check, and a ratio comfortably above 1 means short term assets cover short term obligations. But the ratio tells you almost nothing about speed, and speed is where the cash is. For that you need the cycle.

The Working Capital Cycle: Where Your Cash Actually Goes

The working capital cycle measures how many days pass between paying for something and being paid for it. It has three components: how long stock or work in progress sits before it is invoiced, how long customers take to pay, and how long you take to pay suppliers. Add the first two, subtract the third, and you have your cash conversion cycle.

Debtor Days

Debtors divided by annual sales, multiplied by 365. This is usually the largest and most fixable number in the cycle. It is also the one most businesses never measure. If your terms are 30 days and your debtor days are 70, the gap is not a customer problem, it is a systems problem, and our guide to debtor management walks through how to close it.

Context helps here. The Payment Times Reporting Regulator’s update published 24 August 2026, covering Reporting Cycle 10 (1 July to 31 December 2025), reports that the average common payment term used by large reporting businesses has been stable at 29 days across three reporting cycles. Your large customers have standardised their terms. Most small suppliers have not.

Inventory and Work in Progress Days

Inventory divided by cost of goods sold, multiplied by 365. For service businesses the equivalent is work in progress: hours or stages delivered but not yet invoiced. Unbilled work in progress is the most invisible form of trapped cash there is, because it does not even appear on the debtors ledger where someone might chase it.

Creditor Days

Trade creditors divided by cost of goods sold, multiplied by 365. This is the one component where a higher number helps your cash, because supplier credit is free funding. The limit is commercial and ethical rather than mathematical: stretching suppliers damages relationships, costs you discounts, and eventually costs you supply.

The Cash Conversion Cycle

Debtor days plus inventory days less creditor days. A cycle of 80 days means that every dollar of cost you incur takes roughly 80 days to come back as cash. The lower the number, the less funding your business needs to operate at any given size. Some businesses run a negative cycle, which is why they can grow without ever needing an overdraft.

Worked Example: Finding $308,000 in a $3 Million Business

Numbers make this concrete. Take a business with $3,000,000 of annual sales excluding GST, cost of goods sold of $1,800,000, debtors of $600,000, stock of $300,000 and trade creditors of $250,000. All of these come straight off the balance sheet and profit and loss. Here is what the cycle looks like.

Step 1: Measure the Cycle

• Debtor days: $600,000 divided by $3,000,000, times 365 = 73 days
• Inventory days: $300,000 divided by $1,800,000, times 365 = 61 days
• Creditor days: $250,000 divided by $1,800,000, times 365 = 51 days
• Cash conversion cycle: 73 plus 61 less 51 = 83 days
• Net operating working capital funded by the business: $600,000 plus $300,000 less $250,000 = $650,000

Read that last line carefully. This business has $650,000 of its own money permanently parked in the working capital cycle. If it is borrowing to fund that at, say, 9 per cent, the cycle is costing roughly $58,500 a year in interest before anyone has made a sale.

Step 2: Tighten Two Numbers

Now assume the business does nothing heroic. It invoices the day the job finishes instead of at month end, turns on automated reminders, and calls anything over 30 days. Debtor days fall from 73 to 45. Separately, it reviews slow moving stock lines and cuts inventory days from 61 to 45.

• Debtors at 45 days: $3,000,000 times 45 divided by 365 = $369,863, releasing about $230,000
• Stock at 45 days: $1,800,000 times 45 divided by 365 = $221,918, releasing about $78,000
• Total cash released: roughly $308,000
• New cash conversion cycle: 45 plus 45 less 51 = 39 days, down from 83

That is $308,000 of cash appearing in the bank account with no new customers, no price rise and no cost cutting. It is the single highest return activity available to most established businesses, and it is almost always ignored in favour of chasing more sales.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), when a client tells me they need funding to grow, the first place I look is the working capital cycle. More often than not the money they want to borrow is already sitting in their own debtors ledger.

Why Growth Makes the Problem Worse, Not Better

Growth consumes cash. When sales rise, debtors and stock rise immediately, while the profit from those sales arrives weeks or months later. A business growing 40 per cent a year with an 83 day cycle needs a great deal more funding this year than last, which is why fast growing and profitable businesses fail.

Work it through on the example above. Take that business from $3,000,000 to $4,200,000 of sales with the cycle unchanged, and the working capital requirement rises from $650,000 to roughly $910,000. The business has to find another $260,000 of cash purely to stand still operationally, on top of any capital expenditure the growth requires.

This is why we insist on a forward looking cash flow forecast alongside the budget rather than a profit budget on its own. A profit forecast will tell you the growth is a good idea. Only the cash forecast tells you whether you can survive it. Our guide to building a budget your business will actually follow is the starting point, and how much your business actually needs to make covers the other side of the same question.

Seven Ways to Release Trapped Cash

Every lever in working capital is either about invoicing sooner, collecting faster, holding less, or paying later. None of them require more sales, and most can be implemented within one quarter. Start with the two that move the most money in the typical Australian small business: the invoicing lag and the debtors ledger.

• Invoice the day the work is done. The gap between completion and invoicing is pure, free delay that you control entirely.
• Take deposits and bill in stages. Progress claims convert work in progress into debtors, and deposits convert it into cash before you start.
• Run a real follow up system. Automated reminders before and after the due date, then a phone call. See debtor management for the full ladder.
• Cut slow moving stock. Rank inventory by turns. The bottom 20 per cent of lines usually holds a disproportionate share of the cash and the obsolescence risk.
• Negotiate supplier terms deliberately. Ask for 45 days rather than 30 at renewal, and take early settlement discounts only when the discount beats your cost of funds.
• Review your GST method. If your customers are slower than your suppliers, reporting GST on a cash basis stops you funding the ATO ahead of your own collections. See GST cash vs accruals.
• Separate the money you are holding for someone else. GST, PAYG withholding and superannuation are not working capital, even though they sit in your account. Our article on the six bank accounts every business owner needs sets out the structure.

The Tax Angle Nobody Mentions

Working capital has a tax dimension that makes the squeeze worse. If you report on an accruals basis you are taxed on invoiced sales and you remit GST on invoiced sales, whether or not the customer has paid. So the very debtors that are consuming your cash are also generating tax and GST liabilities that consume more of it.

The same applies to stock. Closing stock is not deductible, it sits on the balance sheet, so a business that buys hard in June to “reduce tax” achieves the opposite: it converts cash into an asset with no deduction and worsens the working capital position going into the new year. Real EOFY planning works the other way around, which is what we cover under tax planning.

There is a genuine tax benefit available at the other end of the cycle. Where a debt is truly unrecoverable and you write it off correctly before year end, you get an income tax deduction and, on an accruals GST basis, a decreasing adjustment for the GST. That is real cash recovered, and the mechanics are set out in our bad debt write off guide.

How Much Working Capital Do You Actually Need?

There is no universal answer, because it depends entirely on your cycle. The practical way to size it is to take your daily cost of operating, multiply by your cash conversion cycle in days, and add a buffer for seasonality and one large customer failing. That figure is your minimum operating cash requirement.

Using the example business, daily cost of goods is about $4,932 and total daily operating cost will be higher once overheads are included. On an 83 day cycle the business needs to be able to fund roughly three months of operating cost before collections catch up. At 39 days it needs to fund less than half that. Same business, half the funding requirement, achieved purely through process.

Track four numbers monthly: debtor days, inventory or work in progress days, creditor days, and the cash conversion cycle. Put them on the front page of your management pack next to the five financial numbers every business owner must know and review them at the same meeting every month. That single discipline is worth more than most cost cutting exercises.

If nobody in your business currently owns these numbers, that is the gap a Virtual CFO engagement fills. And if you are eventually selling the business, a short cash conversion cycle is one of the things a buyer pays for, because it reduces the working capital they have to inject on day one. Our guide to valuing a business in Australia explains why.

Frequently Asked Questions

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