How to work out your working capital

Why it matters

Working capital tells you how much cash is tied up in running the business and whether you can meet bills coming due.

Growing businesses often run short even when profitable, because stock and debtors grow before cash arrives.

The steps

1. List current assets. Cash, accounts receivable, stock and prepayments. These turn to cash within 12 months.
2. List current liabilities. Accounts payable, GST and PAYG owing, wages and super owing and loan repayments due in 12 months.
3. Work out working capital. Current assets minus current liabilities.
4. Work out the current ratio. Current assets divided by current liabilities. Above 1 means assets cover short-term debts.
5. Work out operating working capital. Receivables plus stock minus payables. It shows cash tied up in operations.
6. Compare with sales. Express operating working capital as days of sales. A rising number means more cash is tied up.
7. Act on it. Collect faster, hold less stock or negotiate longer terms to free cash.

Worked example

Example Distribution Pty Ltd works out its working capital at 31 October.

Item	Amount
Cash	A$51,400
Accounts receivable	A$22,000
Stock	A$80,000
Current assets	A$153,400
Accounts payable	A$10,260
GST owing	A$24,090
Wages and super owing	A$9,650
Current liabilities	A$44,000
Working capital	153,400 - 44,000 = A$109,400
Current ratio	153,400 / 44,000 = 3.49
Operating working capital	22,000 + 80,000 - 10,260 = A$91,740

The business can cover its short-term debts 3.5 times. Most of the working capital is A$80,000 of stock, so the focus is stock turnover.

Common mistakes

• Counting slow-moving stock as cash.
• Leaving out GST and super owing.
• Looking at the ratio without looking at the mix.
• Ignoring the due dates of loans.

Next step

Use the Working capital calculator first. Then see Pulsify for finance leaders.