Working Capital Questions Answered
Real answers to the questions we hear most from Australian businesses trying to understand their cash flow and working capital position. No jargon, just practical insights.
What exactly counts as working capital?
It's the difference between what you can access quickly (current assets like cash, accounts receivable, inventory) and what you owe soon (current liabilities like payables, short-term loans). Simple as that.
How often should I check my working capital?
Depends on your business rhythm. Some review monthly, others quarterly. If you're growing fast or experiencing seasonal swings, monthly reviews help you spot patterns before they become problems.
Is negative working capital always bad?
Not necessarily. Some businesses operate successfully with negative working capital if they collect from customers before paying suppliers. But it requires careful management and isn't suitable for every industry.
What's a healthy working capital ratio?
Between 1.2 and 2.0 works for most businesses. Below 1.0 means you might struggle to cover short-term obligations. Above 3.0 could mean you're sitting on resources that could be working harder for you.
Can I improve working capital without borrowing?
Absolutely. Tighten up your collection processes, negotiate better payment terms with suppliers, or reduce excess inventory. These operational changes often deliver better results than external funding.
Why does my profit not match my cash position?
Because accounting profit includes non-cash items and timing differences. You might show profit on paper while waiting for customers to pay, or you've invested in inventory that hasn't sold yet.
Deeper Questions
How do seasonal businesses manage working capital gaps?
The challenge hits hardest when you need to build inventory before your busy season. Some businesses set aside reserves during peak months, others arrange seasonal credit facilities. The key is planning three to six months ahead and understanding your cash conversion cycle inside out.
What role does inventory play in working capital analysis?
Inventory ties up cash until it sells. Too much and you're storing money on shelves. Too little and you risk lost sales. The trick is finding the balance between having enough stock to meet demand without over-investing in products that move slowly.
Should I focus on accounts receivable or payable first?
Start with receivables. Getting paid faster improves cash flow immediately. Then look at payables – not to delay payments unfairly, but to ensure you're using available terms effectively. It's about optimizing both sides of the equation.
How does growth affect working capital needs?
Growth eats working capital. As sales increase, you need more inventory and extend more credit to customers. Many profitable businesses face cash crunches during rapid growth because working capital requirements outpace profit generation.
Expert Perspective
We asked Callum Mortensen, who's spent fifteen years helping Australian businesses navigate cash flow challenges, to share his take on common working capital misconceptions.
Callum Mortensen
Financial Analysis Specialist
"The biggest mistake I see is treating working capital as a one-time calculation. Your working capital needs shift constantly – with seasons, market conditions, and business growth. The businesses that thrive are the ones checking their position regularly and adjusting before small issues become urgent problems. And honestly, most working capital challenges can be addressed through better processes rather than more money."
How We Approach Your Questions
Listen First
We start by understanding your specific situation. Every business has unique working capital challenges shaped by industry, size, and growth stage.
Analyze Together
We review your numbers side-by-side, looking at patterns and identifying opportunities. No mystery calculations – we explain what we see and why it matters.
Build Practical Solutions
We develop approaches that fit your business reality. Sometimes that means process improvements, other times strategic financing. Always practical, never theoretical.
Understanding Your Position
Still Have Questions?
Working capital analysis gets clearer when you can discuss your specific numbers with someone who understands Australian business conditions. We're based in Nowra and work with businesses across NSW dealing with exactly these challenges.
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