Insights · Cash flow · 31 October 2026

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Working capital explained: why profitable businesses still run out of cash

Working capital is the cash tied up in running the business day to day: money customers owe you, stock on the shelf and work in progress, less what you owe suppliers. Get it wrong and a growing, profitable business can still run short of cash.

The simple formula

Working capital = current assets (cash, debtors, stock) minus current liabilities (creditors, GST and PAYG owing, short-term loans). It is the gap between paying out and getting paid.

Three numbers to watch

• Debtor days: how long customers take to pay. Debtors ÷ annual sales × 365.
• Stock days: how long stock sits before it sells.
• Creditor days: how long you take to pay suppliers.

Debtor days plus stock days minus creditor days is your cash conversion cycle: the number of days your own cash funds the business. The shorter, the better.

Five ways to release cash

1. Invoice the day the work is done, with clear terms and online payment.
2. Take deposits or progress payments on larger jobs: see progress claims and retentions.
3. Chase overdue accounts every week, not every month.
4. Cut slow-moving stock.
5. Agree supplier terms that match how you get paid.

Why growth makes it worse

More sales means more debtors and more stock before the cash arrives. Plan growth with a 13-week cash flow forecast and read cash flow vs profit.

Quick answers

What is working capital?

Current assets such as cash, debtors and stock, minus current liabilities such as creditors, tax owing and short-term loans.

How do I work out debtor days?

Divide debtors by annual sales and multiply by 365.

Related reading: Cash flow finance options

Sources

• business.gov.au: Cash flow
• business.gov.au: Guide to managing cash flow

General information only. This article does not take into account your circumstances and is not tax, legal or financial advice. Rates and rules change; check the sources above and get advice for your business before acting.