What is Working Capital? How to Manage Cash in Your Business

a stack of money sitting on top of a table

‍Ever found yourself with plenty of clients and projects, but still struggling to pay this month's bills or make payroll? You might be facing a working capital challenge, one of the most common yet least understood aspects of running a successful business.You track your revenue. You monitor your expenses. But are you paying attention to your cash conversion cycle (CCC)?

The simple definition
Working capital is the difference between your current assets (what you own or what's owed to you) and your current liabilities (what you owe others) that are due within one year. In even simpler terms, it's the money you have available to fund your day-to-day operations, and it’s not the same as what’s in your bank account.Simply put, the cash conversion cycle measures how long it takes for your business to convert investments in services into cash from customers.

Working Capital = Current Assets - Current Liabilities

For service businesses, current assets typically include:
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  • Cash in the bank
  • Outstanding invoices (accounts receivable)
  • Short-term investments
While current liabilities usually include:

‍For service businesses, the calculation is:
  • Bills to vendors (accounts payable)
  • Upcoming payroll obligations
  • Short-term debt payments
  • Tax payments due
‍Payroll and working capital for service businesses and agencies
For service-based businesses and agencies, payroll deserves special attention in working capital calculations. Unlike product-based companies where inventory is the main asset, service businesses have people as their primary "asset."

This creates a unique working capital challenge:
  • Payroll must be paid on fixed, non-negotiable schedules (typically bi-weekly or monthly)
  • Client payments often follow longer, more variable timelines (30-90 days)
  • This timing mismatch can create significant working capital pressure
While payroll doesn't factor into DPO calculations (as it's not part of accounts payable), it's absolutely central to your working capital needs and must be carefully managed.Your CCC would be: 20 + 45 - 15 = 50 days

Read more - “Understanding DPO (Days Payable Outstanding)” →


Why working capital matters

Here's why having good working capital is worth putting some effort into:

  • Operational stability: Sufficient working capital ensures you can pay your team, your vendors, and your bills without disruption.
  • Growth capability: Having extra working capital allows you to take on new clients or projects without waiting for previous payments.
  • Financial resilience: A healthy working capital buffer helps you weather unexpected expenses or payment delays.
  • Bargaining power: Strong working capital gives you the option to negotiate better terms with suppliers or offer more flexible terms to clients when strategically beneficial.

The working capital trap
Many business owners fall into a common trap: confusing revenue or profit with working capital. You can be profitable on paper but still struggle with working capital if:For service businesses, these benchmarks provide general guidance:

  • Clients take 60-90 days to pay (high DSO*)
  • You pay suppliers within 30 days (low DPO*)
  • Your payroll cycle is biweekly, creating regular cash demands
  • You're growing quickly and need to cover expenses for new projects
  • You have seasonal fluctuations in business activity

This mismatch creates a working capital gap, the period where you've paid out money but haven't yet collected from clients.

Read more - “How to Calculate and Improve Your Cash Conversion Cycle” →


5 ways to improve your working capital

For service businesses, these benchmarks provide general guidance:
  1. Accelerate collections: Reduce your Days Sales Outstanding (DSO) by implementing early payment incentives, clear payment terms, and efficient invoicing processes.
  2. Manage payables strategically: Work with suppliers to optimize payment terms that align better with your cash conversion cycle.
  3. Align project timelines with cash flow: Structure project milestones and billing to ensure regular cash inflows that sync with payroll and other fixed expenses.
  4. Forecast cash flow: Implement regular cash flow forecasting to anticipate and prepare for working capital needs, especially around payroll periods.
  5. Maintain cash reserves: For service businesses, maintaining a cash buffer equal to at least one month's payroll provides essential working capital protection.

‍Measuring working capital health

Beyond the basic calculation, these ratios help assess your working capital health:

Working Capital Ratio = Current Assets ÷ Current Liabilities
  • Target: 1.5 to 2.0 (below 1.0 is a red flag)

Cash Conversion Cycle = WIP + DSO - DPO
  • The shorter, the better
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How Cheque helps optimize working capital
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Improving working capital often starts with getting paid faster. Cheque helps by:
  • Reducing DSO through early payment incentives
  • Providing visibility into expected payment timing
  • Automating follow-ups to minimize collection efforts
  • Streamlining the entire invoicing process
  • Helping align client payments with your payroll obligations
Unlike financing options that add debt to solve working capital challenges, Cheque addresses the root cause by helping you collect what you're owed more efficiently.

Understanding and actively managing your working capital is a skill easily learned for any business owner. By focusing on the fundamentals of faster collection, strategic payments, and efficient operations, you can transform your cash flow and build a more financially resilient business.

Want to see how improving your invoicing and collection processes could strengthen your working capital position? Let's talk about how Cheque can help.

Schedule your demo today →