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Understanding working capital

Working capital is the money your business has on hand to cover day-to-day operations. More than just a number, it's a real-time snapshot of your financial health. With nearly 80%¹ of Australian businesses facing cash flow challenges over the past year, understanding and managing working capital has become crucial for sustainable growth.

 

THE EQUATION:

Current assets – Current liabilities = Working Capital

Current assets

  • Cash and Cash Equivalents
  • Accounts Receivable
  • Inventory
  • Prepaid Expenses

Current liabilities

  • Accounts Payable
  • Short-Term Loans
  • Accrued Expenses
  • Taxes Payable

 

Smart working capital management keeps your business running smoothly and profitably. Managing working capital well means more flexibility, less risk and better returns.

 

Strategic implications for businesses

Running your own business means juggling a lot. Managing your cash flow effectively gives you the freedom to focus on what matters most — shaping your market position, mitigating risks and giving your business the edge it needs to thrive.

 

Leveraging digital solutions for greater efficiency

Today’s technology offers powerful ways to simplify business management and confidently plan ahead. Whether streamlining inventory tracking, speeding up payments, or accessing real-time financial insights, embracing digital solutions can allow you to make better decisions and grow your business.

 

Working capital management framework²

Feeling unsure about what to do next? We've got you covered. Start by knowing where your cash position stands. Tackle one minor fix each week by figuring out your most significant challenge — whether it's slow payments, excess stock or paying suppliers too quickly. Finally, track the results and adjust as needed so you know what repeatable processes support your business growth.

 

PHASE 1

Assessment
  • Calculate your current working capital
  • Identify cash flow patterns
  • Evaluate options for your B2B card payments

PHASE 2

Optimisation
  • Keep track of your weekly and monthly projections of expected inflows and outflows
  • Evaluate your credit policies to ensure the current payment terms are helping to boost sales
  • Manage your inventory wisely and adjust reordering to avoid unsold stocks piling up
  • Assess your payment terms with suppliers and customers to identify the advantages of card payments

PHASE 3

Monitoring
  • Monitor your working capital ratio, cash conversion cycle and cash position on a daily and weekly basis
  • Identify early warning signs of payment collection issues through monitoring customer payment patterns
  • Ensure your payment practices remain consistent to strengthen supplier relationships

Gain a competitive edge with card payments

More than just convenient, embracing card payments is an efficient way to boost liquidity and strengthen your financial position. Whether you’re buying from suppliers or selling to customers, modern tools like commercial cards make managing working capital simple and effective.

 

Other working capital metrics you should know³

These simple formulas can help you to gain a clear view of how your business is currently doing with cash flow, liquidity and operational efficiency. Regularly reviewing these metrics helps you stay on top of your daily finances to optimise your resources for long-term growth.

 

 

¹ Aussies dip into personal savings as cash flow problem plagues small businesses, CommBank report shows | 7NEWS

² This framework is a general guide and should be adapted to suit your business’s financial situation. Consider consulting a financial advisor before implementing any changes 

³ These metrics and formulas are provided for educational purposes only. Benchmark ranges may vary by industry and business model. Use them as a starting point and consult a financial expert for tailored analysis.

Disclaimer: This content is provided for general informational purposes only and does not constitute legal, compliance, or financial advice. Organisations should consult qualified professionals to assess their specific finance needs and regulatory obligations. Mention of third-party platforms is for informational purposes only and does not imply endorsement.