--- title: Understanding working capital for success description: understanding working capital image: https://blog.k3.co.nz/hubfs/working%20capital%20article%20image.jpg --- [![K3 logo](https://blog.k3.co.nz/hubfs/K3%20-July2017/Images/logo.svg)](http://www.k3.co.nz/) - [Consulting](http://www.k3.co.nz/consulting/) - [Accounting](http://www.k3.co.nz/accounting/) - [Legal](http://www.k3.co.nz/legal/) - [Insights](https://blog.k3.co.nz) - [Contact](http://www.k3.co.nz/contact/) ![nex6ki-313241](https://blog.k3.co.nz/hs-fs/hubfs/Stock/nex6ki-313241.jpg?width=3344&name=nex6ki-313241.jpg "nex6ki-313241") # Welcome to the K3 hub Your home for all things consulting, accounting and legal. ## Latest Stories [![Jane Jung](https://blog.k3.co.nz/hs-fs/hubfs/Jane%20Jung.png?width=20&name=Jane%20Jung.png) Jane Jung](https://blog.k3.co.nz/author/jane-jung) Jun 16, 2022 ## [what happens if you die without a wil...](https://blog.k3.co.nz/what-happens-if-you-die-without-a-will) [Wills](https://blog.k3.co.nz/topic/wills) [![Richard Matson](https://blog.k3.co.nz/hs-fs/hubfs/Unknown-5-760036-edited.jpeg?width=20&name=Unknown-5-760036-edited.jpeg) Richard Matson](https://blog.k3.co.nz/author/richard-matson) Jun 08, 2022 ## [Business tips: Getting in control of ...](https://blog.k3.co.nz/business-tips-getting-in-control-of-your-spending) [![Ken Brophy](https://blog.k3.co.nz/hs-fs/hubfs/ken-527675-edited.jpeg?width=20&name=ken-527675-edited.jpeg) Ken Brophy](https://blog.k3.co.nz/author/ken-brophy) May 25, 2022 ## [What are we about and where are we go...](https://blog.k3.co.nz/what-are-we-about-and-where-are-we-going) [Consulting](https://blog.k3.co.nz/topic/consulting) [Organisational Design](https://blog.k3.co.nz/topic/organisational-design) [Business Strategy](https://blog.k3.co.nz/topic/business-strategy) [Organisational Change](https://blog.k3.co.nz/topic/organisational-change) [![Evie Bello](https://blog.k3.co.nz/hs-fs/hubfs/Evie%20Bello%20media.jpg?width=20&name=Evie%20Bello%20media.jpg) Evie Bello](https://blog.k3.co.nz/author/evie-bello) May 25, 2022 ## [Standard form small trade contracts: ...](https://blog.k3.co.nz/standard-form-small-trade-contracts-the-imposition-of-a-requirement-for-fairness) [Legal](https://blog.k3.co.nz/topic/legal) [Business - SME/Corporate](https://blog.k3.co.nz/topic/business-sme-corporate) ## Featured Stories Filter By Categories - [Legal](https://blog.k3.co.nz/topic/legal) - [Consulting](https://blog.k3.co.nz/topic/consulting) - [Video](https://blog.k3.co.nz/topic/video) - [Business - SME/Corporate](https://blog.k3.co.nz/topic/business-sme-corporate) [![Richard Matson](https://blog.k3.co.nz/hubfs/Unknown-5-760036-edited.jpeg)](https://blog.k3.co.nz/author/richard-matson) By [Richard Matson](https://blog.k3.co.nz/author/richard-matson) August 26, 2020 ## [Understanding working capital for success](https://blog.k3.co.nz/understanding-working-capital-for-success)   [Accounting](https://blog.k3.co.nz/topic/accounting) [Small Business](https://blog.k3.co.nz/topic/small-business) [Cashflow](https://blog.k3.co.nz/topic/cashflow) [Financial management](https://blog.k3.co.nz/topic/financial-management) If cashflow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.   **What is working capital?** Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.   To calculate your working capital: Cash + debtors + stock + work in progress - creditors - taxes owing.   For example, if your business had the following balances: Cash $150,000 Debtors $120,000 Stock $100,000 Creditors $45,000 Taxes owing $25,000 Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 - $45,000 - $25,000).   If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent. It’s likely your working capital has taken a hit due to Covid-19.   Now is the time to review your processes and boost your working capital. Consider the following strategies: **1. Build up enough cash to cover at least 2 months’ sales value.** One of the key learnings from lockdown was how important it is for businesses to have enough cash in the bank to get them through a shutdown. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level. **2. Renegotiate your debt.** If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt as a result of Covid? We can work with you and your bank manager to determine your best finance options. **3. Negotiate with suppliers.** Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They’ll be suffering too, so work together to come to the best arrangement for you both. **4. Set aside money for taxes.** Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account so you have the cash to cover tax payments as they fall due. **5. Inject sufficient funds.** If the above strategies don’t boost your working capital sufficiently, you’ll need to invest your own funds into your business to cover your working capital requirements. Even with the many challenges of a post-pandemic economy, undertaking regular working capital checks is an effective way to help increase your business’s cashflow. 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