Working capital is current assets minus current liabilities: the cash, unpaid invoices and stock you can turn into money within 12 months, less everything you have to pay in the same period. A landscaping business with $65,500 of current assets and $39,200 of current liabilities has $26,300 of working capital and a working capital ratio of 1.67. In Australia, the GST you have collected but not yet paid, PAYG withholding and unpaid super are liabilities, so they come off the total. They are not your money, even while they sit in your account.
Want to see the next 13 weeks, not just today? Working capital is a snapshot. Pair it with a cash flow forecast to see when money arrives and when the BAS, super and supplier bills fall due. To speed up the money coming in, send invoices from the free Australian invoice generator the day the work is finished.
What is working capital?
Working capital is the short-term money a business has to operate with once its short-term debts are accounted for. It shows whether you can pay suppliers, staff, the ATO and your super obligations on time from what you already have or are about to collect. Positive working capital gives you a buffer; negative working capital means you are relying on new sales or credit to pay old bills.
It matters most for businesses that pay costs before they get paid. A tradie who buys $8,000 of materials, pays a subcontractor weekly and then invoices on 30-day terms is funding the job for six weeks or more. That gap is funded by working capital.
What is the working capital formula?
Working capital = current assets − current liabilities. "Current" means expected to turn into cash, or fall due, within the next 12 months. Both figures come straight from your balance sheet.
Current assets and current liabilities in an Australian small business
| Current assets | Current liabilities |
|---|---|
| Cash in business bank accounts | Supplier bills (accounts payable) |
| Unpaid customer invoices (accounts receivable) | GST collected but not yet paid to the ATO |
| Stock and materials on hand | PAYG withholding deducted from wages |
| Work in progress you can bill soon | Super owed for employees |
| Prepaid expenses (insurance, rego paid ahead) | PAYG income tax instalments due |
| GST refund owed to you by the ATO | Credit cards, overdraft, loan repayments due within 12 months |
Long-term items do not count. Your ute, tools and equipment are non-current assets, and the part of a vehicle loan that is due after the next 12 months is a non-current liability.
What is a good working capital ratio?
The working capital ratio (also called the current ratio) is current assets ÷ current liabilities. A ratio between about 1.2 and 2 is generally comfortable for a small business. Below 1 means short-term debts exceed short-term assets, and that is a warning sign.
A ratio far above 2 is not automatically good either. It can mean cash sitting idle that could pay down a loan, or stock that is not moving. Context matters: a café that is paid on the spot can run lower than a builder who waits on progress payments.
The quick ratio: a tougher test
The quick ratio removes stock and prepaid expenses, because you cannot pay the ATO with a pallet of pavers or next year's insurance. Quick ratio = (cash + receivables) ÷ current liabilities. A quick ratio of 1 or more means you could meet every short-term bill from cash and invoices alone, provided your clients pay.
Working capital example: an Australian balance sheet in AUD
Coastline Landscaping Pty Ltd has two employees and is registered for GST, reporting GST on an accrual basis. Here are its current assets and liabilities at 30 September 2026, the end of the first BAS quarter, with that quarter's BAS due on 28 October.
| At 30 September 2026 | AUD |
|---|---|
| Cash at bank | $22,000 |
| Accounts receivable (unpaid invoices, incl. GST) | $33,000 |
| Materials and plants on hand | $8,500 |
| Prepaid insurance | $2,000 |
| Total current assets | $65,500 |
| Supplier bills due | $14,300 |
| GST payable for July to September (net of GST credits) | $7,400 |
| PAYG withholding owed | $3,900 |
| PAYG income tax instalment for the quarter | $3,100 |
| Super owed for the last pay run | $1,700 |
| Business credit card | $2,800 |
| Vehicle loan, repayments due in the next 12 months | $6,000 |
| Total current liabilities | $39,200 |
| Working capital ($65,500 − $39,200) | $26,300 |
| Working capital ratio ($65,500 ÷ $39,200) | 1.67 |
| Quick ratio (($22,000 + $33,000) ÷ $39,200) | 1.40 |
On paper Coastline is in good shape. Now look at the cash line alone. The owner logs into the bank, sees $22,000 and feels comfortable. But $7,400 + $3,900 + $3,100 + $1,700 = $16,100 of that is owed to the ATO and the employees' super funds within weeks. The cash Coastline can actually spend is $5,900, and the supplier bills are another $14,300. Everything else depends on the $33,000 of receivables arriving on time.
Is GST you have collected part of your working capital?
No. GST you have charged customers is held for the ATO and shows up as a current liability until you pay it with your BAS. Counting it as your own cash is the single most common working capital mistake in Australian small businesses.
The way GST affects the numbers depends on your accounting basis. On an accrual basis, as in the example, GST is payable for the period you issue the invoice, so the GST inside unpaid invoices is already in the GST payable figure. On a cash basis (available to businesses with aggregated turnover under $10 million), GST is payable for the period you receive payment. That means one-eleventh of every unpaid invoice is GST you will owe once the client pays. If Coastline used the cash basis, $3,000 of its $33,000 receivables would really belong to the ATO.
A simple habit fixes most of this: when a payment lands, move one-eleventh of it into a separate tax account. For a $2,200 invoice, that is $200. If you need to check the maths on mixed invoices, see how to calculate GST.
How do BAS, PAYG and super affect working capital?
Your BAS, PAYG withholding and super are predictable short-term liabilities. They build up every week and are paid in lumps, so they quietly drain working capital if you do not track them. Treat them as bills that already exist, not as future costs.
- Quarterly BAS: due 28 October, 28 February, 28 April and 28 July for the four quarters. The ATO says lodging quarterly BAS online may give you an extra two weeks for quarters one, three and four. See the ATO's BAS due dates.
- PAYG withholding: tax you deduct from employee wages is held for the ATO and reported on your activity statement. It is never available to spend.
- Super, now on payday: from 1 July 2026, Payday Super means employers pay super with each pay run, and contributions generally need to reach the employee's fund within 7 business days after payday. The quarterly lump has gone, replaced by smaller, more frequent payments. Your super liability at any date is lower, but you can no longer use three months of super as an informal cash buffer. The Fair Work Ombudsman's Payday Super summary explains the change.
- PAYG instalments: prepayments of income tax, usually with your BAS. They are due whether or not your clients have paid you.
Working capital vs cash flow vs profit
Profit tells you whether the business earns more than it costs over a period. Working capital tells you whether you can meet short-term obligations on a given date. Cash flow tells you when money actually moves. A business can be strong on one and weak on another.
The classic trap is a profitable business that runs short of cash. A builder who wins a big job buys materials and pays subcontractors in March, invoices on completion in May and gets paid on 30-day terms in June. The job is profitable, but working capital falls sharply for three months. That is why growth often feels tight. Our guide to gross profit vs net profit covers the profit side.
How to improve working capital: 8 levers
You improve working capital by collecting money sooner, paying out later (within agreed terms), and holding less money in stock. For most trades and service businesses, faster collection is by far the biggest lever.
- Take deposits. Ask for 20 to 50 per cent before materials are ordered so the client funds the job, not you. See how to write a deposit invoice.
- Use progress claims on longer jobs. Bill at agreed stages (slab, frame, lock-up, completion) instead of one invoice at the end. Our progress claim template shows the layout.
- Shorten your payment terms. Moving from 30 days to 14 days makes a large difference. If Coastline bills $33,000 a month including GST, receivables at 30-day terms sit around $33,000. At 14-day terms they sit closer to $15,400, which frees about $17,600 in cash if clients pay on time. See invoice payment terms.
- Invoice the same day. The payment clock only starts when the invoice arrives. A week's delay on every invoice is a week of revenue you are lending to clients.
- Make paying easy. Put PayID, BSB and account number and a payment link on every invoice, with the invoice number as the reference.
- Chase on a schedule. A reminder the day after the due date, again at 7 and 14 days, then a phone call. InvoiceSonic can send automatic reminders at 7, 14 and 30 days after the due date if you would rather not do this by hand. For the manual approach, see how to chase overdue invoices.
- Hold less stock. Order materials per job where suppliers can deliver quickly, and return or sell slow-moving items.
- Use supplier terms fully. If a supplier gives you 30 days end of month, pay on the due date, not the day the bill arrives. Never stretch past agreed terms; it damages trust and can cost you trade accounts.
Warning signs your working capital is too tight
The clearest warning is needing this month's income to pay last month's bills. If that is happening, work out your working capital and quick ratio now, before the next BAS falls due.
- You use GST or PAYG money to pay suppliers and hope to replace it before the BAS.
- Your working capital ratio is under 1, or your quick ratio is well under 1.
- Receivables are growing faster than sales, which means clients are taking longer to pay.
- You are paying suppliers late or relying on the credit card or overdraft for routine costs.
- You turn down work because you cannot afford the materials upfront.
If you are already behind on a BAS, contact the ATO early about payment options rather than waiting for the debt to grow. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) also has free resources for businesses under financial pressure.
This article is general information, not tax, accounting or financial advice. Figures are illustrative. For guidance specific to your situation, see the ATO and business.gov.au, or speak to a registered tax or BAS agent.
Frequently asked questions
What is a good working capital ratio?
For most small businesses a working capital ratio between about 1.2 and 2 is comfortable, meaning you hold $1.20 to $2 of current assets for every $1 you owe in the next 12 months. Below 1 means you owe more in the short term than you can readily cover. Well above 2 can mean cash or stock is sitting idle.
Is GST payable a current liability?
Yes. GST you have collected but not yet paid to the ATO is a current liability, usually due with your next BAS. It should be shown on the balance sheet and subtracted when you work out working capital, not counted as part of your cash.
Can working capital be negative?
Yes. Negative working capital means current liabilities are larger than current assets. Some businesses that are paid upfront and pay suppliers later run that way safely, but for most trades and service businesses it is a warning that a single slow payer or a BAS bill could leave you unable to pay on time.
What is the difference between working capital and cash flow?
Working capital is a snapshot on one date: what you could turn into cash within a year, less what you must pay within a year. Cash flow is movement over a period: money in and money out. You can have positive working capital and still hit a cash shortfall if your receivables arrive after your bills are due.
How can a sole trader improve working capital quickly?
The fastest levers are taking deposits before work starts, invoicing the same day the job is finished, shortening payment terms to 7 or 14 days, offering PayID or a payment link, and chasing on a fixed schedule. Each one turns receivables into cash sooner without borrowing.
Invoice the day the job is done
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