Working Capital and Receivables

What working capital actually funds

Working capital is the cash a business needs to keep operating between paying for inputs and being paid for outputs. In ledger terms it is current assets less current liabilities, but for a client it is simpler than that: it is the money locked up in stock and unpaid invoices, minus the breathing room their own suppliers and the ATO allow them.

When the cycle is short and tight, a business can grow on its own cash. When it stretches — stock sitting longer, debtors paying later — the business has to find that funding somewhere, usually from an overdraft, the owner's savings, or by quietly falling behind on its own creditors. Advisers who can read this cycle spot the squeeze before the bank statement does.

Why receivables dominate

For most service and trade businesses, receivables are the biggest and most controllable slice of working capital. A manufacturer can run lean stock; a consultancy holds almost none. But nearly every business on commercial terms carries debtors, and those debtors grow in direct proportion to sales.

That is the trap in a growing client: the faster they sell, the more cash is tied up in unpaid invoices, so success itself drains the bank account. This is why a rapidly expanding business can be the one most at risk of a cash crisis — a pattern worth flagging early when you review an expanding client's numbers.

Slow collection forces external funding

Every extra day a client's invoices stay unpaid is a day they fund their customers' operations instead of their own. Stretch the debtor book by a month and the business must find a month's worth of sales in cash from elsewhere — typically by drawing on credit at a cost, or by delaying their own payments and damaging supplier goodwill.

You can put a dollar figure on this for a client with the Merion calculator suite, which turns debtor days into a financing cost. Framed that way, faster collection stops being an administrative nicety and becomes a measurable return on effort.

The levers an adviser can adjust

Three levers move the working capital cycle: how long stock sits, how quickly debtors pay, and how long the client can reasonably take to pay suppliers. Receivables are usually the most responsive to advice — tighter terms, deposits, prompt invoicing and disciplined follow-up all shorten the cycle without touching the sales pipeline.

Where an account has already aged past the point of polite reminders, escalating it recovers cash that is otherwise frozen. A commission-only recovery partner lets the client act without upfront cost; the mechanics are at refer a debt. This is general information, not advice for a specific client.