Working capital is current assets less current liabilities — the money tied up funding day-to-day operations. How much you need is determined by your cash conversion cycle: how long stock sits, plus how long customers take to pay, minus how long you take to pay suppliers. A business with a 62-day cycle and R6 million of annual costs needs roughly R1 million of working capital permanently.
It is also why profitable businesses run out of money, and why growth makes the problem worse rather than better.
The calculation
Working capital = Current assets − Current liabilities
Current assets: cash, debtors, stock, prepayments. Current liabilities: creditors, VAT and PAYE owed to SARS, overdraft, loans due within 12 months.
A worked example:
| Amount | |
|---|---|
| Bank | R285,000 |
| Debtors | R640,000 |
| Stock | R310,000 |
| Current assets | R1,235,000 |
| Creditors | (R395,000) |
| VAT and PAYE owed | (R210,000) |
| Loans due within 12 months | (R180,000) |
| Current liabilities | (R785,000) |
| Working capital | R450,000 |
The current ratio — current assets ÷ current liabilities — is 1.57 here. Above 1.5 is comfortable, below 1.0 is a warning. See how to read a balance sheet.
How much you actually need: the cash conversion cycle
The balance sheet tells you what you have. The cash conversion cycle tells you what you need.
Cash conversion cycle = Days inventory + Days receivable − Days payable
Days inventory
Stock ÷ Cost of sales × 365
How long stock sits before it sells. A service business has none.
Days receivable
Debtors ÷ Revenue × 365
How long customers take to pay after you invoice.
Days payable
Creditors ÷ Cost of sales × 365
How long you take to pay suppliers. This one reduces your requirement, because suppliers are financing you.
A full worked example
A distribution business:
| Amount | |
|---|---|
| Annual revenue | R7,400,000 |
| Cost of sales | R4,800,000 |
| Stock | R520,000 |
| Debtors | R1,150,000 |
| Creditors | R480,000 |
Days inventory: R520,000 ÷ R4,800,000 × 365 = 40 days Days receivable: R1,150,000 ÷ R7,400,000 × 365 = 57 days Days payable: R480,000 ÷ R4,800,000 × 365 = 37 days
Cash conversion cycle = 40 + 57 − 37 = 60 days
What that means: money leaves this business 60 days before it comes back. It must fund 60 days of operating costs permanently.
Roughly: R4,800,000 ÷ 365 × 60 = R789,041 of working capital, just to stand still.
Why growth makes it worse
This is the part that catches good businesses.
Grow 40% and your stock and debtors grow with you. In the example above, a 40% increase in trading takes stock to R728,000 and debtors to R1,610,000 — an extra R668,000 tied up, before you have collected a cent of the additional profit.
Growth consumes cash. A business growing quickly can be more profitable and more fragile at the same time, which is why fast-growing businesses fail with full order books.
The practical implication: before accepting a large order or expanding, calculate the working capital it requires. Winning work you cannot fund is worse than not winning it.
Reducing what you need
Every day removed from the cycle releases cash permanently.
In the example, one day is worth R13,151. Removing 15 days releases nearly R200,000 — with no borrowing, no new sales and no cost.
Collect faster
The largest lever for most businesses. Deposits upfront, a specific due date on the invoice, automated reminders before and after, and a consistent stop-supply rule. See how to get customers to pay you on time.
Hold less stock
Order more frequently in smaller quantities where suppliers allow it, identify slow-moving lines and clear them, and stop reordering what is not selling. Stock is cash you cannot spend.
Pay suppliers on terms, not early
Paying early is lending money to your supplier at your own cost of capital. Pay on the due date — not late, which damages the relationship and your credit standing, but not early either.
Negotiate longer terms where you have the standing to. Thirty days to forty-five days on R480,000 of purchases releases meaningful cash.
Invoice immediately
Every day between doing the work and issuing the invoice is a day added to the cycle for no benefit.
The trap: VAT and PAYE are not working capital
Your bank balance includes VAT you have collected and PAYE you have withheld. That money belongs to SARS.
In the first example, R210,000 of the R285,000 bank balance was owed to SARS. Real available cash was closer to R75,000.
Treating tax money as working capital is the most common route into a SARS payment arrangement. Move it to a separate account on receipt. See why your bank balance is not your profit.
Funding the gap
Where the cycle cannot be shortened enough, the gap has to be funded.
| Option | Suits |
|---|---|
| Overdraft | Short-term fluctuations and seasonality |
| Invoice discounting | Businesses with long debtor days and creditworthy customers |
| Supplier credit | The cheapest funding available, if you can negotiate it |
| Owner funding | Common in small businesses, and quasi-equity on the balance sheet |
| Term loan | Generally the wrong instrument — working capital needs are revolving, not fixed |
Match the instrument to the need. Funding a permanent working capital requirement with a twelve-month facility that must be settled is a structural mismatch lenders notice. See what financial statements do banks want.
Frequently asked questions
What is working capital? Current assets less current liabilities — the money tied up funding day-to-day operations. Current assets are cash, debtors, stock and prepayments; current liabilities are creditors, VAT and PAYE owed to SARS, overdrafts and loans due within 12 months.
How much working capital does a small business need? It depends on your cash conversion cycle. Calculate days inventory plus days receivable minus days payable, then multiply your daily operating cost by that number. A business with a 60-day cycle and R4.8 million of annual costs needs roughly R789,000 permanently.
What is the cash conversion cycle? Days inventory plus days receivable minus days payable. It measures how long money is out of the business between paying suppliers and being paid by customers, and it determines how much working capital you must fund.
Why does growth cause cash flow problems? Because stock and debtors grow with revenue. A 40% increase in trading ties up 40% more in stock and unpaid invoices before any of the additional profit is collected, which is why fast-growing businesses can fail with full order books.
How do I reduce my working capital requirement? Collect faster through deposits, clear due dates and automated reminders; hold less stock by ordering more frequently and clearing slow lines; pay suppliers on the due date rather than early; and invoice immediately rather than in batches.
Should I pay suppliers early? No, unless there is a settlement discount worth more than your cost of capital. Paying early lends money to your supplier at your expense. Pay on the due date — not late, which damages your credit standing, but not early either.
Is my bank balance my working capital? No, and treating it that way is dangerous. Your bank balance includes VAT collected and PAYE withheld that belongs to SARS. Subtract those before assessing what is genuinely available.
Know the number, then shorten it
Most small businesses have never calculated their cash conversion cycle, which means they cannot tell you how much funding the business structurally requires — or what a day of improvement is worth.
Smartbook reports debtor days, stock days and the cash conversion cycle in monthly management accounts, so the number is visible and the improvement is measurable.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Worked examples are illustrative. General guidance, not advice on your circumstances.