Ask most small business owners what keeps them up at night and the answer is rarely profit. It’s cash. The jobs are booked, the invoices are going out and the profit and loss looks healthy, yet the bank balance always seems to be a step behind. Wages, suppliers, super and the BAS have a habit of landing in the same week, and the money that customers owe the business is still weeks away.
If that sounds familiar, the business may not have a profit problem at all. It may have a working capital problem, and the good news is that working capital can be understood, managed and, where it makes sense, funded.
Profit and Cash Flow Are Not the Same Thing
Profit is the difference between what the business earns and what it costs to run over a period of time. Cash flow is the movement of money in and out of the bank account, and when it actually happens.
The two rarely line up. A sale is counted as income on the day it is invoiced, but the cash may not arrive for 30, 60 or even 90 days. Stock is paid for before it is sold. Wages are paid every week or fortnight regardless of when customers pay. GST collected on sales has to be paid to the ATO each quarter, even if some of those invoices are still unpaid.
Working capital is the money a business needs to cover that gap. In simple terms, it is the cash tied up in stock, unpaid customer invoices and work in progress, less what the business itself owes to its suppliers in the short term.
How the Working Capital Cycle Works
Consider a business that turns over $100,000 a month. It pays its suppliers within 14 days, holds around a month of stock and gives its customers 30-day terms, although in practice most pay closer to 60 days.
At any point in time, that business has around two months of sales, roughly $200,000, sitting in unpaid invoices. Add a month of stock and it can easily have a quarter of a million dollars tied up before it sees a cent. Every dollar of that has to come from somewhere, whether that is cash reserves, the owner’s own pocket or some form of funding.
This is also why growth can be so hard on cash flow. If the same business lifts sales by 25%, it needs roughly 25% more stock and carries 25% more in unpaid invoices, long before the extra revenue reaches the bank. Winning a big contract or opening a second location is great news, but it costs money before it makes money.
Signs Your Working Capital Needs Attention
- You’re profitable on paper but regularly short of cash.
- BAS, PAYG, super or tax payments often feel like a stretch, or are falling behind.
- Customers take longer to pay you than your suppliers allow you.
- Personal savings, a home loan redraw or credit cards are covering business costs.
- Seasonal dips, such as the slower January period, put real pressure on the business.
- You’ve turned down work, or a good supplier deal, because you couldn’t fund the upfront costs.
Start with the Numbers
The first step is always clarity, and that is where a good bookkeeper earns their keep. Up-to-date, reconciled records allow you to see how long customers are actually taking to pay, which invoices are overdue, how much is tied up in stock and which months are traditionally tight.
A simple cash flow forecast, looking ahead three to six months, turns that history into a plan. It shows when the pressure points are coming, so they can be managed before they become a crisis. Many businesses also find it helpful to set aside GST and PAYG in a separate account as it is collected, so the BAS is never a surprise.
Practical Ways to Improve Cash Flow
Before looking at finance, it is worth making sure the business is collecting and spending cash as efficiently as it can. Some of the most effective changes are also the simplest:
- Invoice promptly, ideally on completion of the job rather than at the end of the month.
- Ask for deposits or progress payments on larger jobs.
- Make it easy to pay, and follow up overdue accounts consistently.
- Review payment terms with customers and negotiate longer terms with suppliers where possible.
- Keep stock levels in line with what is actually selling.
- Understand your merchant fees and overall pricing, particularly now that card surcharges are no longer permitted.
When Finance Can Help
Even a well-run business can face a genuine timing gap, particularly when it is growing, seasonal or working with slow-paying customers. In those situations, the right finance can give the business breathing room and the confidence to say yes to opportunities. The main options include:
- Business overdraft. A flexible limit attached to the business transaction account, used as needed and repaid as cash comes in. Interest is generally only charged on the amount used.
- Line of credit. Similar to an overdraft, a revolving facility the business can draw on and repay as required, often used to manage seasonal swings.
- Invoice finance. Unlocks cash tied up in unpaid customer invoices, typically advancing a large share of each approved invoice within days rather than waiting 30 to 90 days. The facility grows as sales grow, which makes it well suited to expanding businesses that sell to other businesses.
- Short-term business loan. A fixed amount over a set term, suited to a specific need such as a large order, a seasonal stock build or bridging a known gap.
- Trade and stock finance. Pays suppliers, including overseas suppliers, for stock, with the business repaying once the goods are sold.
- Equipment and vehicle finance. Rather than paying cash for vehicles and equipment, financing them over their working life keeps cash in the business for day-to-day needs.
- ATO debt solutions. Where tax has fallen behind, a payment arrangement with the ATO or refinancing the debt with a business loan can stabilise the position and protect the business from more serious action.
Match the Funding to the Need
The most common mistake we see is a mismatch between the problem and the solution. Long-term debt used to fund a short-term gap can leave the business paying for years for a problem that lasted a few months. Short-term or high-cost funding used for long-term needs can quickly put pressure on cash flow itself. Credit cards and fast online loans can be easy to obtain, but the cost is not always clear until the repayments start.
The right structure depends on the business, its cash flow cycle, its security position and its plans. Lenders also differ widely in how they assess small business and self-employed borrowers, so the first answer from your bank is not necessarily the only one.
Plan Ahead, Not in a Hurry
Finance is far easier to arrange when a business doesn’t urgently need it. Lenders look favourably on up-to-date financials, current BAS lodgements and a clear plan, and are more cautious when a business is already under pressure. Putting a facility in place ahead of a busy season or a period of growth means it is there when it is needed, rather than being arranged in a rush.
With Christmas trading, holiday wages and the quieter January period ahead, now is an ideal time to review how cash flow is tracking and whether the business has the right support in place.
Talk to Glenn at Captiva Finance
Glenn Watkins is the Director of Captiva Finance and specialises in finance for small business and self-employed owners. With more than 30 years of finance and business experience and access to over 50 lenders, Glenn works with business owners to understand their cash flow, goals and pressure points, and to find funding that genuinely suits the business.
Glenn offers a free Finance Discovery Session to review your current position and talk through your options, with no upfront cost and no obligation.
Call or text Glenn on 0477 318 710, email glenn@captivafinance.com.au or visit www.captivafinance.com.au.
This article is general information only and does not take into account your objectives, financial situation or needs. All lending is subject to lender assessment, eligibility criteria, terms, conditions, fees and charges.