Working Capital: the Cash Trapped Inside Your Business (and How to Free It)

If your business is turning a profit but you’re constantly watching the bank account, working capital is almost certainly the culprit. It’s one of the most misunderstood concepts in small business finance — and one of the most fixable.

What is working capital?

Working capital is the difference between what your business owns short-term (cash, outstanding invoices, stock) and what it owes short-term (supplier bills, credit cards, short-term debt):

Working Capital = Current Assets − Current Liabilities

A positive number means your business can fund its day-to-day operations from its own resources. A negative number means you’re borrowing from tomorrow to pay for today — and that’s where cash crunches come from.

The more useful way to think about it is as a cycle. Money flows out to pay staff and suppliers. Then it’s locked inside your business as stock, work in progress, or unpaid invoices. Then — eventually — it comes back when customers pay. The speed of that cycle, and the amount of cash stuck inside it at any point, is your working capital position.

Why profit and cash are not the same thing

This is the one that trips up a lot of Queensland SME owners. You look at your P&L and it shows a $50,000 profit. Then you look at your bank account and there’s $8,000 in it. What happened?

The P&L records revenue when you invoice, not when you’re paid. It records expenses when they’re incurred, not always when cash leaves. So a business can be very profitable on paper and simultaneously have nothing to pay its bills — especially if it’s growing quickly, because growth accelerates the cash cycle problem.

This pattern is common in construction and property services, where invoices go out on progress claims but payment can lag 30–60 days (or more if a head contractor is slow). It’s equally common in e-commerce, where you might pay for inventory months before it sells and clears your account.

The three places your cash hides

Debtors (accounts receivable). Every invoice you’ve sent but not yet been paid for is cash out on loan to your customers — interest-free. The average debtor days for Australian SMEs sits somewhere between 35 and 50 days depending on industry. If your terms are 30 days but customers are actually paying at 50, you’re carrying 20 days of revenue as an involuntary loan.

Inventory and work in progress. For product-based businesses and construction firms, stock and WIP are cash that’s been transformed into something else — something that hasn’t been sold or invoiced yet. Every extra week of inventory you hold is a week’s worth of cash you can’t use.

Prepayments and deposits. Supplier deposits, annual insurance premiums, software subscriptions paid upfront — these are cash that has left your account before you’ve received any value. They’re often invisible until someone maps them out.

How growing faster makes the problem worse

Here’s the trap that catches ambitious businesses: as revenue increases, working capital needs increase at the same rate — or faster. Doubling revenue might mean doubling your debtor book, doubling your inventory, and doubling your supplier payments, all before the extra cash has arrived.

This is why e-commerce businesses with fast-growing sales often run out of cash. A professional services firm winning new clients can face the same problem if it’s hiring ahead of billing. Growth is great. It just has a cash cost that your P&L won’t warn you about.

Three levers to free up cash — without going to the bank

You don’t always need to borrow to fix a working capital problem. Often, there’s cash already sitting in the business that can be released.

Reduce debtor days. Invoice the moment work is complete. Send payment reminders at day 7, day 14, and the day before the due date. Offer direct debit or BPAY to remove friction. A one-week improvement in collection times on a $2M debtor book is roughly $38,000 in cash freed up.

Extend creditor days — within reason. Negotiate 45- or 60-day terms with your regular suppliers. Pay on the last day allowed, not the first. Don’t pay early unless there’s a discount that makes it worthwhile.

Improve inventory turns. If you’re carrying more than six to eight weeks of stock without a specific reason, you likely have cash sitting idle. Better demand forecasting and tighter reorder points are often worth more than a line of credit.

The numbers to track every month

The metrics that matter are Debtor Days (how long customers take to pay), Creditor Days (how long you take to pay suppliers), and Inventory Days (how long stock sits before it’s sold). Together they give you the Cash Conversion Cycle — the number of days between paying for something and being paid for it. The lower the number, the less working capital you need.

These numbers should be in your monthly management reporting every single month. If they’re not, you’re flying blind on one of the most important levers in your business.

What this means for your business

Most SMEs across Brisbane and Queensland have at least one working capital lever they haven’t pulled. Identifying which one — and quantifying the cash it could release — is often one of the first things we work through with a new client. It doesn’t require a loan, a restructure, or a big initiative. It just requires someone looking at the right numbers each month and asking the right questions.

If cash regularly catches you off guard, it’s also one of the clearest signs a business has outgrown running its own finance.

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Want to see how working capital is tracked in a real monthly board pack? View a sample report. Or if you’d like to talk through your own cash cycle, book a 30-minute discovery call — no obligation.