Working capital, cashflow and debtor days — the three numbers every NZ owner should watch
- sp8002
- 3 days ago
- 4 min read
Updated: 2 days ago
Working capital, cashflow and debtor days are the three operating numbers that tell a New Zealand business owner whether the business is genuinely healthy or just busy. Working capital is the difference between current assets and current liabilities. Cashflow is the actual movement of cash in and out of the business across a period. Debtor days is the average time between issuing an invoice and being paid. Together these three numbers explain why a profitable-looking business can still run out of cash, and why a tight cash position is almost always a symptom of one or more of them being out of line.
In short
- Working capital = current assets minus current liabilities.
- Cashflow = actual cash in minus actual cash out across a period.
- Debtor days = (debtors ÷ revenue) × number of days in the period.
- A profitable business can still run out of cash if these three drift.
- Watching them monthly is the operating discipline that prevents cash surprises.
The proper definition
Working capital is the operating buffer of the business. It is calculated by taking current assets — cash, debtors, work in progress and stock — and subtracting current liabilities — creditors, GST owing, PAYE owing and short-term debt. Positive working capital means the business can pay its short-term obligations from short-term assets. Negative working capital means the business is being funded by its suppliers and the tax department, which is workable for some business models but fragile when something slips.
Cashflow is the actual movement of cash through the bank account across a period. It is different from profit because profit is recognised when the invoice is issued, while cash is only received when the customer pays. A business that issues a hundred thousand of invoices in a month, has eighty thousand of costs and gets paid on a sixty-day cycle has good profit and poor cashflow in that month. Both states are real.
Debtor days is the average time between issuing an invoice and being paid. The formula is debtors divided by revenue, multiplied by the number of days in the period. For a business with three hundred thousand in debtors and one million in monthly revenue, debtor days is around thirty days. New Zealand small business sits around forty-five to sixty days on average, with significant variation by industry. Lower is almost always better. Reducing debtor days by ten almost always produces more cash in the bank than chasing a new customer worth the same revenue.
Why this matters for an Auckland one-to-ten-million business
The most common cash problem in an Auckland one-to-ten-million business is not a profit problem. It is a working capital problem. The business is profitable on paper, the owner is working hard, the jobs are getting done — and the bank balance keeps disappointing.
The mechanics are usually some combination of these. Debtors stretched out to fifty or sixty days because no one is chasing them tightly. Work in progress sitting on the balance sheet for weeks because jobs are not invoiced promptly on completion. Stock building up because purchasing is not matched to the job pipeline. GST and PAYE balances treated as available cash rather than as money owed.
The fix is rarely dramatic. Tighten the invoicing cycle so work is billed within a working day of completion. Run weekly debtor calls on anything over thirty days. Treat GST and PAYE as already-spoken-for cash. Match stock purchases to actual job demand rather than to a feeling that prices might rise. Each step on its own moves the cash position by a few percent. Done together over ninety days they typically free up a meaningful share of monthly revenue back into the bank.
The mistake most owners make
The most common mistake is reading the profit and loss without reading the balance sheet. The profit and loss tells the owner whether the trading was profitable. The balance sheet tells the owner whether the cash position is healthy. Both are needed. An owner who reads only the profit and loss can miss a working capital problem until the bank balance forces them to look.
The second mistake is treating GST and PAYE as available money. They are not. They are amounts owed to the tax department on a fixed schedule. A business that uses GST and PAYE as a working capital float is borrowing from the tax department at zero interest until it cannot. When the bill comes, the cash crunch is sudden.
The third mistake is treating debtor days as an administrative number rather than as a cash lever. It is one of the largest cash levers in any service or trades business.
Common follow-up questions
Q: What is a good level of working capital for a two-million-dollar business?
A: A common rule of thumb is one to two months of operating costs in positive working capital. For a two-million business with eighty thousand of monthly operating costs, eighty to one hundred and sixty thousand of positive working capital is a reasonable target. Below that the business is fragile to a single late customer or supplier issue.
Q: My business is profitable but the bank balance is flat. What is going on?
A: Almost always one of three things. Debtors are stretching out. Stock or work in progress is building up. Or the GST and PAYE balances are quietly inflating. A look at the balance sheet movements across the last six months will usually show which.
Q: Should I offer discounts for early payment?
A: Sometimes. The maths depends on your gross margin and your cost of capital. A two percent discount for payment in seven days is expensive if your gross margin is thirty percent, and cheap if your bank facility is fully drawn. Run the numbers before deciding.
Q: How often should I look at debtor days?
A: Monthly at a minimum, weekly during a tight period. The number itself is less important than the trend across six months. Flat is fine, falling is good, rising for two months in a row is a signal to act.
Next step
If your business is profitable on paper but the bank balance does not reflect it, the first call is fifteen minutes by phone. Book a 15-minute call with Steve at strategizeauckland.info/book-online — or call directly on 027 737 2858.
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