How much working capital does your business need?
The working capital your business needs is shaped by its lowest cash balance, not simply by how much it sells.
How much working capital does your business need? Start by forecasting when cash will actually arrive and when payments must leave. Identify the largest shortfall after usable opening cash, then investigate an appropriate contingency and how that requirement could be met. There is no universal amount that suits every Australian business.
This article provides a practical planning framework, not a recommendation to borrow. Your accountant can help validate the forecast and financial assumptions; a finance broker can assess possible facilities against the business’s circumstances and lender requirements.
The short answer
Map customer collections, stock purchases and supplier payments by date.
Include wages, rent, tax, superannuation, existing repayments and other commitments.
Find the cash-flow low point rather than relying on annual profit or turnover.
Test delayed receipts, seasonal changes and higher costs before deciding on a contingency.
Distinguish the cash requirement from the amount of any proposed loan.
What does working capital mean?
Working capital supports the business’s day-to-day operating cycle: buying stock or materials, paying people and suppliers, and waiting for customers to pay. The central planning question is whether accessible funds will cover those commitments at the time they fall due.
In accounting, net working capital is current assets minus current liabilities. It is a balance-sheet measure, not a calculation of the cash reserve to hold. Inventory and unpaid invoices may contribute to current assets without being immediately available to pay wages. An accountant should assess their quality and the timing of liabilities.
For cash planning, business.gov.au’s cash-flow statement guide explains how recording cash movements can reveal payment cycles, seasonal trends and potential shortages. Use the accounts and the cash forecast together; neither replaces the other.
Why turnover is not enough
Two businesses with similar sales can have very different funding needs. A retailer collecting payment immediately may still pay for stock well before selling it. A service business with little inventory may fund several payroll cycles before a large customer pays.
Consider the sequence of spending, delivery, invoicing and collection. Supplier deposits, freight, minimum orders, invoice disputes and customer approval processes can extend the time between cash going out and coming back. A turnover percentage does not capture that sequence or the effect of one large delayed receipt.
Business Victoria’s cash-flow forecasting guidance identifies stock management, supplier payments and debt recovery as parts of working capital management. The relevant question is what those activities mean for your own dates and amounts.
Build the estimate from usable cash and actual obligations
Opening cash: what is genuinely available?
Reconcile the starting bank balance and distinguish usable funds from restricted or otherwise unavailable amounts. Do not treat an unused facility limit as cash already in the account. If access to it is relevant, show the existing facility separately, including its current drawings and conditions.
Be consistent with earmarked funds. If cash set aside for a known tax payment is excluded from opening usable cash, do not also charge that payment against the same forecast without accounting for the separate reserve. Alternatively, include both the cash and its matching payment. Your accountant can help avoid double counting.
Receipts: when will customers actually pay?
Use invoices, collection history, contracts and current customer information to estimate receipts. Separate confirmed payments from hoped-for sales. An invoice’s due date may not be its likely collection date, and a sales forecast is not proof that the money will arrive.
Review customer concentration and overdue balances. If the forecast depends on one substantial receipt, test its delay or non-payment explicitly. For a newer business, label the assumptions and identify what evidence supports them.
Payments: include more than ordinary overheads
Stock, materials, supplier deposits, freight and other operating inputs.
Wages, contractor payments, rent, utilities, insurance and maintenance.
Tax, superannuation and other liabilities at the applicable payment dates.
Existing finance repayments, fees and agreed repayment arrangements.
Owner or related-party withdrawals and planned one-off spending.
Keep equipment purchases, fit-out or expansion costs identifiable rather than disguising them as recurring working capital. They still affect the overall cash forecast, but their purpose and useful life may call for a separate funding discussion. Obtain qualified advice on accounting and tax treatment.
How much working capital is needed at the cash-flow low point?
Calculate each period’s closing cash as opening cash plus receipts minus payments. Carry that closing balance into the next period. Before adding any new funding, locate the lowest projected balance and when it occurs.
Choose a forecast interval that exposes important payment dates. A monthly forecast can appear comfortable while concealing a shortage before a large customer pays late in the month. A weekly or, where necessary, daily view can make that mismatch visible. Extend the horizon far enough to capture relevant seasonal peaks and commitments.
Business Queensland’s budgets and forecasts guide explains the opening-to-closing cash calculation and the need to update estimates against actual results. It also distinguishes timing changes from emerging permanent trends.
Illustrative example: finding the peak cash gap
Assume a hypothetical business begins with $35,000 of usable cash. The figures below represent all cash receipts and payments included in this simplified four-week forecast, before any new facility. They are illustrative assumptions, not a client case or finance offer.
Week 1: $25,000 received and $50,000 paid. Closing cash: $10,000.
Week 2: $20,000 received and $65,000 paid. Closing cash: negative $35,000.
Week 3: $15,000 received and $40,000 paid. Closing cash: negative $60,000.
Week 4: $110,000 received and $30,000 paid. Closing cash: $20,000.
The lowest weekly closing balance is negative $60,000. That identifies a $60,000 forecast gap, not permission to overdraw an account. A more detailed payment-date forecast could reveal a different low point within a week.
If, solely for illustration, the owner and advisers investigate a further $20,000 contingency, the additional funding planning figure becomes $80,000. The forecast has already included the $35,000 opening cash: subtracting it again would understate the gap.
The $80,000 is not automatically the loan to request. Existing accessible facilities, an owner contribution or operational changes may affect how the requirement is met. Any new finance fees, repayments and access conditions must then be incorporated and the forecast recalculated. The assumed week-four recovery is not guaranteed.
How should you assess a contingency reserve?
A contingency allows for uncertainty beyond the base forecast. Rather than adopting a standard number of months or percentage of sales, identify what could change, how much cash it could absorb and how quickly the business could respond.
A major customer paying later than expected.
Lower seasonal sales or a delayed start to a new contract.
Higher stock, freight, utility or labour costs.
Equipment failure, repairs or unexpected operational spending.
A supplier requiring earlier payment or a larger deposit.
Run alternative scenarios, including combinations that are commercially plausible. Avoid counting the same risk both in stressed payments and again in an unexplained buffer. Record why the reserve was chosen, where it would be held and whether it would actually be accessible.
For operating measures to investigate alongside the reserve, see Business Queensland’s cash-flow management guide. Changes to stock and payment terms should be assessed for their commercial consequences, not assumed to be available.
How do seasonality and growth change the requirement?
Use the period of greatest pressure, not an average month. A seasonal business may buy inventory and roster additional staff before its sales peak. Growth may also bring larger supplier orders or more labour before the related customer receipts arrive.
Compare the proposed activity with the business’s actual capacity and margins. Extra sales can consume cash initially, and the forecast should show what happens if the expected volume or collection dates are not achieved.
For business contexts, Shopify cash-flow case study and fashion manufacturer trade-finance case study provide further reading. They do not establish that another business will qualify for the same funding or achieve the same outcome.
What will a lender or finance broker want to understand?
A clear forecast helps explain the purpose, amount, timing and expected repayment source of funding. Depending on the lender and facility, an initial assessment may involve financial statements, current management accounts, bank statements, aged receivables and payables, existing debt details and supporting contracts or orders.
Lenders may also examine sustainable earnings, current obligations, security, customer concentration and the reliability of assumptions. An accounting profit or a large requested limit does not establish repayment capacity.
The business.gov.au business-loan guide outlines preparation and matters such as loan terms, fees and security. Fairlane can help assess possible structures and lender information requirements, without replacing your accountant’s financial review or deciding whether a proposed expansion is suitable.
Questions to ask before committing
What causes the gap, and is it temporary, recurring or worsening?
Which receipts and payment dates are supported by evidence?
Does the calculation already include opening cash and existing facilities?
What happens if the largest receipt is late or costs are higher?
Can the business meet repayments and maintain an appropriate reserve?
What fees, security, guarantees and access conditions need professional review?
Who will update the forecast and compare it with actual cash movements?
Frequently asked questions
Is there a standard working capital amount for every business?
No. The requirement depends on payment timing, stock, obligations, seasonality, growth plans and uncertainty. A generic reserve rule can be a discussion point, but it does not replace a forecast of the particular business.
Can I use current assets minus current liabilities to calculate my cash buffer?
Not on its own. Net working capital includes assets such as stock and receivables that may not be immediately convertible to cash. Use it alongside a dated cash forecast and an assessment of asset quality.
Should opening cash be subtracted from the forecast shortfall?
Only if it has not already been included. A forecast that begins with usable opening cash already accounts for that amount. Subtracting it from the resulting negative low point again would double count it.
Does a forecast gap mean I should take out a loan?
No. First investigate its cause and possible operational responses. Any proposed finance should be assessed for cost, accessibility, repayment capacity and consequences; approval and suitability cannot be assumed.
How often should I review the estimate?
Review it as receipts, costs and commitments change, and compare the forecast with actual results. Businesses with concentrated receipts or tight payment dates may need closer monitoring than a stable business with more predictable cash movements.
Start with the timing, then assess the structure
A useful working capital estimate makes the cash-flow low point, assumptions and contingency visible. Validate those figures with your accountant, then assess how any remaining requirement could be met without treating the available loan limit as the amount to borrow.
Assessing Your Working Capital Needs?
Discuss your cash requirement and possible funding structures.
General information only. This article does not constitute financial, credit, legal, tax, accounting, compliance or valuation advice. Finance is subject to lender approval, eligibility criteria, terms, fees and conditions. Consider obtaining independent professional advice for your circumstances before acting.
