Quick answer
Working capital is the money a business has available to run day to day, worked out as current assets (cash, receivables, stock) minus current liabilities (supplier bills, tax owing, short-term debt due within 12 months). Positive working capital means short-term resources cover short-term obligations. Lenders use it to judge whether a business can absorb a slow month and still meet repayments.
Key points
- Formula: current assets minus current liabilities, both measured over the next 12 months
- Positive means you can cover near-term bills from near-term resources; negative is a warning sign for most businesses
- GST and PAYG withholding sitting in your account belong to the ATO, so don't count them as spare cash
- Growth soaks up working capital, which is why fast-growing businesses often feel short of cash
Working capital measures the short-term breathing room in a business. Take everything you expect to turn into cash within a year, subtract everything you’ll have to pay within a year, and what remains is your working capital.
Working capital = current assets − current liabilities
Your accountant can pull both figures straight from the balance sheet.
What goes into each side?
| Current assets | Current liabilities |
|---|---|
| Cash in business accounts | Trade creditors (supplier bills) |
| Trade debtors (invoices customers owe you) | GST, PAYG withholding and other tax owing to the ATO |
| Stock and work in progress | Super owed to staff |
| Prepayments | Wages and leave owing |
| Repayments on loans due in the next 12 months, overdrafts, credit cards |
A positive result means the business can meet near-term commitments from near-term resources. A negative one means it’s leaning on future income, fresh borrowing or slower payments to suppliers to get by.
The GST trap that flatters the bank balance
Here’s a detail that catches a lot of owners. When you invoice a customer, you collect GST on the ATO’s behalf. When you pay wages, you withhold PAYG. That money lands in your account and looks like yours, but it’s a liability until your next BAS.
A business with $80k in the bank and $35k of GST and withholding due next month really has about $45k to work with. Treating the full balance as spare is one of the most common ways small businesses fall behind with the ATO. Moving tax money into a separate account each week makes the true working capital position visible at a glance.
Why lenders care about working capital
When a lender assesses a business, working capital tells it how much shock the business can absorb. A business with a healthy surplus can ride out a slow month, a late-paying customer or an unexpected repair and still meet loan repayments.
Lenders often express it as the current ratio, which divides current assets by current liabilities. You can run your own numbers in our working capital ratio calculator.
Thin or negative working capital doesn’t automatically mean a decline. Lenders look at why. A seasonal dip, a big order being fulfilled, or a recent equipment purchase paid from cash are all explainable. If you need to top up working capital right now, send us a short enquiry and we’ll walk through which facility fits the gap.
Worked example: a growing wholesaler
A Ballarat food wholesaler has these balances at 30 September:
- Cash: $60k
- Debtors: $220k
- Stock: $180k
- Current assets: $460k
- Supplier bills: $190k
- GST and PAYG owing: $40k
- Loan repayments due in 12 months: $70k
- Current liabilities: $300k
Working capital is $160k and the current ratio is about 1.5. On paper, healthy.
Then a supermarket chain offers a contract that doubles volume, paying on 60-day terms. Stock and debtors will balloon before any extra cash comes in. The wholesaler’s working capital, measured in dollars, will rise, yet the cash in the account will fall sharply for the first few months. This is why growth often needs funding: options like invoice finance or a line of credit release cash from those debtors while the business scales up. How long the money stays tied up is measured by the working capital cycle.
Related terms
- Working capital cycle: the time cash spends locked in stock and debtors
- Liquidity: how readily assets turn into cash
- Cash flow: money moving in and out over a period
- Debtor days: the average wait for customer payments
For a fuller walkthrough, see our guide to working capital for small business.
When the working capital won’t stretch far enough
Most businesses run short at some point, often because things are going well. Banks are a strong first stop for an overdraft or line of credit if your financials suit them. When they don’t, or the timing doesn’t work, working capital loans from non-bank and property-backed lenders can fill the hole.
The enquiry itself is a one-minute job. Sending the form does nothing to your credit history, and we keep your enquiry to ourselves rather than broadcasting it to every funder going. A person on our team looks over your numbers and phones you back with a view. Accurate figures for debtors, stock and turnover mean the facility we suggest first is likely the one that works.
Frequently asked questions
What is a good working capital figure?
There's no single number, because it depends on the size and type of business. Many lenders look at the current ratio instead, comparing current assets with current liabilities. A ratio comfortably above 1 suggests short-term obligations are covered.
Can a profitable business have negative working capital?
Yes. A business can show a profit while its cash is tied up in unpaid invoices and stock, or after using short-term money to buy long-term assets. Some cash-paid businesses, like supermarkets, run negative working capital by design because they collect from customers before paying suppliers.
Is working capital the same as cash flow?
No. Working capital is a snapshot of short-term assets and liabilities on one date. Cash flow tracks money moving in and out over a period. They're linked, since poor cash flow usually shows up as shrinking working capital.
How do businesses borrow for working capital?
Common options include an overdraft, a line of credit, invoice finance, a short-term unsecured loan or a property-secured facility. The best fit depends on whether the shortfall is temporary, seasonal or ongoing.