How healthy is your working capital?

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It is worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

If your working capital is strong, you have enough on hand to pay your team, your suppliers and the ATO on time and still have room to move. If it is weak, even a small bump in expenses or a delay in customer payments can cause stress.

In 2025, with increasing costs and tighter margins for many Australian businesses, keeping an eye on working capital is more important than ever. First Class Accounts Ovens and Murray helps by keeping your bookkeeping up to date, so you always have a clear picture of your numbers instead of guessing.

Why working capital matters

So, why is working capital such a critical metric?

Having the liquid capital needed to trade It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day to day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

Healthy working capital gives you breathing space. You can pay people on time, take up good opportunities when they arise and sleep better knowing what is coming in and what is going out.

This is where cash flow confidence becomes practical. When First Class Accounts Ovens and Murray is managing your day to day bookkeeping and people payments, you can see your true position more clearly and make decisions based on real numbers, not gut feel.

How to achieve a healthy level of working capital

To achieve a healthy level of working capital you will need to:

Proactively manage your cashflow

Cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.

In real terms, this might look like tightening up your debtor follow up, reviewing your payment terms, spreading larger bills over a realistic period and planning for regular commitments such as wages, super and GST so they do not come as a surprise.

First Class Accounts Ovens and Murray can help you put simple, practical systems in place to support this. That might include regular cashflow reports, payment scheduling, and clearer visibility of who you need to pay and when. The aim is to make your cashflow more predictable, which improves your working capital and reduces stress.

Monitor and forecast your financial position

Running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. 

Cloud accounting software and business intelligence apps have made it easier than ever to create up to date, real time reports and run dashboards that show your key metrics.

In 2025, there is a wide range of connected apps that integrate with platforms such as Xero to give you clearer insights. These tools can help you track cashflow, see upcoming payroll, GST and PAYG obligations, and spot trends before they turn into problems.

First Class Accounts Ovens and Murray offers business app advisory to help you choose and set up the right tools for your business. We then use those tools to give you regular, easy to understand reports and forecasts, so you know how healthy your working capital is and what is coming up over the next few weeks and months.

Use additional finance when required

If working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short term finance options, such as overdraft extensions or invoice finance, and longer term business loans can be needed to keep working capital on an equilibrium.

Before taking on any extra finance, it is important to understand why your working capital is under pressure and whether it is a temporary issue or an ongoing pattern. That way you can choose the most suitable type of funding and avoid simply masking a deeper problem with more debt.

By keeping your books current and providing clear reports, First Class Accounts Ovens and Murray can help you and your accountant or finance provider see the full picture. This makes it easier to have informed conversations about what kind of funding, if any, is appropriate for your situation.

Support to keep your working capital healthy

Working closely with your accountant and bookkeeping team is vital if you want to promote the ideal level of working capital in the business. Together, they can help manage your cashflow, monitor your financial metrics and support you to access additional finance and funding when your capital needs a boost.

First Class Accounts Ovens and Murray focuses on reliable, done for you bookkeeping, cashflow confidence and real world advice. We become part of your team, keeping your numbers accurate and your reports clear, so you can make better decisions about working capital.

If you would like to understand how healthy your working capital really is, and what you can do to improve it, talk to First Class Accounts Ovens and Murray about reviewing your current position and setting up better support around your cashflow.

What is working capital in a business?

Working capital is the difference between your current assets and current liabilities. It shows whether you have enough available resources to pay your short term commitments.

How does working capital affect cashflow

Working capital affects how easily you can pay suppliers, wages and tax on time. Strong working capital supports smoother cashflow and reduces day to day financial pressure.

How can I improve my working capital

You can improve working capital by tightening debtor collection, managing expenses, planning for regular commitments, using helpful apps and keeping your bookkeeping up to date.

Do I need extra finance to fix working capital problems

Sometimes extra finance is useful, but it should be based on clear reports and an understanding of why your working capital is under pressure, not used to cover ongoing problems.

How can First Class Accounts Ovens and Murray help with working capital

First Class Accounts Ovens and Murray keeps your books accurate, helps you monitor cashflow and working capital, and provides real world advice so you can make better decisions.

Review your expenses - and save yourself money

Running a business will always mean incurring certain expenses or 'spend'.

Whether you’re a large family business or a small fledgling startup, there will be costs, overheads and supplier bills that mount up – and these expenses will gradually chip away at your cash position, making it more difficult to grow and make a profit.

So, what can you do to reduce your spend levels? And what impact will this have on your overall margins, profits and ability to fund the next stage in your business journey?

Getting proactive with your spend management

Spend management is all about getting in control of your expenses – and, where possible, aiming to reduce the level of costs and overheads that you incur as a company.

Why does this matter? 

Well, excessive spending eats into your cash flow, reduces your profit margins and stops you from achieving the profits that you’re capable of as a business.

So if you can get proactive with your spend management, you can actually make your company a far more financially productive enterprise – and that’s great for your overall business health.

So, what can you do to reduce spend and slim down your company expenses?

Here are some key ways to reduce expenses:

Reduce your overheads

Your overheads are the unavoidable costs of running your business, producing your products or supplying your services.

If you have bricks and mortar premises, these overheads will include rental payments, utility bills and even the cost of paying your staff.

Drill down into the numbers and see where there are opportunities to reduce these overhead costs. That could mean moving to smaller premises, or reducing the size of your workforce, to reduce payroll expenditure.

Put limits on staff expenses

If your employees can claim expenses, or buy raw materials and equipment with the company’s money, these costs can soon start to rack up. It’s a good idea to put a spending limit in place, so each staff member can only spend up to an agreed amount.

Having a clear expenses policy helps, as will training up your staff in good spend management techniques. Expenses cards – such as Webexpenses, Soldo or Pleo – allow you to quickly set spend limits, track expenses and pull your expenses data through to your cloud accounting platform for processing.

Look for cheaper suppliers

If you can reduce your supplier costs, this will go a long way to bringing down your overall spend.

If you’ve been with certain key suppliers for years, look around for new quotes, look at current market prices and see if you can negotiate better deals. And if your old suppliers aren’t flexible enough, try swapping to newer, more eager suppliers who will be willing to meet you in the middle on price.

Make your operations leaner

The bigger your operational costs are, the less margin you’ll make on your end products and services.

One way to resolve this is to aim for a ‘lean approach’, paring back your staff, resources and operational complexity to the bare minimum.

By making the business as lean as possible, whilst still delivering the same output, you keep your revenue stable, but reduce the spend level that’s eating into your cost of goods sold (COGS). The smaller your COGS, the more profit you make on each unit or sale – and that means better cash flow, more working capital and bigger profits.

Talk to us about improving your spend management

If you’d like to get in control of your expenses, we’d love to chat.

We’ll review your current costs, run forecasting, and help highlight the key areas where expenses can be cut. Then we’ll help you formulate a proactive spend management programme, to reduce your unnecessary spending.

Xero's short-term cashflow feature for businesses

Business cashflow is simply money coming in and money going out of the business. Your outgoings will include things like rent, payroll, taxes and supplies. Your income will be revenue from sales but might also include investment funds or the sale of assets.

For most businesses, income and expenditure don’t always happen at the same time so focussing on strong cashflow management will help you prepare for the shortfalls and also manage surplus income.

Cashflow reports allow you to look back at cashflow in your business. This can uncover cashflow patterns over time and show you how much money you need to run your business each month.

Cashflow forecasts look forward by combining payment dates and due dates for invoices, to give you an idea of what your cashflow will be like going forward.

Managing healthy cashflow

Xero’s short-term cash flow feature gives you an up-to-date dashboard view of your organisation's cashflow. You can choose multiple bank accounts and see the projected cashflow over 7-30 days. The more information you include, the more accurate your forecast will be.

Healthy cashflow management gives you better control, so you are more prepared for growth or for the unexpected. Read the article at Xero Central to learn more about this feature.

We can help. Talk to us about improving your business cashflow.

Understanding working capital to maintain business success

If cashflow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. It is important for you to have an understanding of your working capital to maintain business success. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.

What is working capital?

Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.

To calculate your working capital: Cash + debtors + stock + work in progress - creditors - taxes owing

For example, if your business had the following balances:

Cash $150,000
Debtors $120,000
Stock $100,000
Creditors $45,000
Taxes owing $25,000

Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 - $45,000 - $25,000).

If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent.

It’s likely your working capital has taken a hit due to Covid-19. Now is the time to review your processes and boost your working capital.

Consider the following strategies:

Build up enough cash to cover at least 2 months’ sales value

One of the key learnings from lockdown was how important it is for businesses to have enough cash in the bank to get them through a shutdown. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level.

Renegotiate your debt

If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt as a result of Covid? We can work with you and your bank manager to determine your best finance options.

Negotiate with suppliers

Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They’ll be suffering too, so work together to come to the best arrangement for you both.

Set aside money for taxes

Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account so you have the cash to cover tax payments as they fall due.

Inject sufficient funds

If the above strategies don’t boost your working capital sufficiently, you’ll need to invest your own funds into your business to cover your working capital requirements.

Even with the many challenges of a post-pandemic economy, undertaking regular working capital checks is an effective way to help increase your business’s cashflow. We can help you calculate your working capital requirements and identify strategies you can implement to increase your working capital.

“Change is not a threat, it’s an opportunity. Survival is not the goal, transformative success is.” - Seth Godin

We can help. Talk to us about your working capital.