Quick answer
The working capital gap is the cash a business has to fund between paying for stock, wages and suppliers and getting paid by customers. It's measured with the cash conversion cycle — stock days plus debtor days minus supplier days — multiplied by average daily costs. A profitable business can still run short if the gap is larger than its cash, especially while growing.
Key points
- Cash conversion cycle = stock days + debtor days − supplier days.
- Gap in dollars ≈ cycle days × average daily costs.
- Growth makes each day of the cycle more expensive.
- Shrink the gap first; fund what remains with the right facility.
Why can a profitable business run out of cash?
Profit and cash run on different clocks. Your profit and loss statement records a sale when you invoice it and a cost when you incur it. Your bank account records them when money actually moves. If you pay for materials in March, pay wages through April, invoice in May and get paid in late June, the job may be very profitable — but for three months, it’s a hole in your bank balance.
Multiply that across every job, every order and every customer, and you get the working capital gap: the amount of cash your business needs on hand just to keep its normal cycle turning.
It’s not a sign of failure. A café has a small gap — customers pay at the till, suppliers are paid weekly. A manufacturer selling to retailers on 60-day terms has a big one. The problem only arises when the gap is bigger than the cash you have, or when something stretches it unexpectedly.
How do you measure the gap?
The tool accountants use is the cash conversion cycle (CCC):
CCC = stock days + debtor days − supplier days
- Stock days — on average, how long stock sits before it’s sold. Value of stock on hand ÷ yearly cost of goods sold × 365.
- Debtor days — on average, how long customers take to pay. Amount owed by customers ÷ yearly sales × 365.
- Supplier days — on average, how long you take to pay suppliers. Amount owed to suppliers ÷ yearly purchases × 365.
To turn days into dollars:
Gap ≈ CCC × (yearly operating costs ÷ 365)
Our working capital gap calculator does this instantly and draws the cycle for you.
A worked example
Here’s an illustrative wholesale business — not a real company:
| Item | Figure |
|---|---|
| Yearly operating costs (stock, wages, rent, everything) | $2,190,000 |
| Average daily costs | $6,000 |
| Stock days | 35 |
| Debtor days | 50 |
| Supplier days | 30 |
| Cash conversion cycle | 55 days |
| Working capital gap | about $330,000 |
For 55 days, every dollar this business spends is out of the account before it returns. At $6,000 a day, roughly $330,000 is permanently tied up in the cycle. If the business has $150,000 in the bank, it’s not “short” because it’s unprofitable. It’s short because its model needs more working capital than it holds.
What happens when the business grows?
This is where many owners get caught. Suppose the wholesaler grows 20% next year. Its cycle is still 55 days, but each day now costs about $7,200 instead of $6,000. The gap grows to roughly $396,000 — an extra $66,000 of cash needed before the new revenue catches up.
That’s why growing businesses so often feel short of money even in record years. Growth is a cash-consuming activity. The growth capital page goes into planning for it.
What stretches the gap unexpectedly?
- A big customer paying late. Ten extra debtor days on a large book can add tens of thousands to the gap overnight. See late-paying customers.
- Over-ordering stock. A bulk buy that sits for months lengthens stock days.
- Suppliers tightening terms. Moving from 30-day terms to cash on delivery shortens supplier days — which widens your gap.
- Tax timing. BAS, PAYG instalments and super land on fixed dates regardless of where you are in the cycle. With Payday Super starting 1 July 2026, super leaves the account much closer to each pay run.
- Seasonality. Pre-season stock and staff costs arrive before peak revenue. See seasonal peaks.
How do you shrink the gap without borrowing?
Start with the free levers. Each day you cut from the cycle releases a day’s worth of costs — about $6,000 in the example above.
Debtor days
- Invoice the day the work is done, not at the end of the month
- Make payment easy — direct bank details, card links, clear due dates
- Follow up a few days before the due date, not weeks after
- Use deposits or progress billing on large jobs
- Review customers who are consistently slow
Stock days
- Identify slow lines and clear them, even at a small discount
- Order closer to demand where suppliers allow
- Review minimum order quantities against real sales
Supplier days
- Negotiate longer terms, especially if you’re a reliable payer
- Use the full term you’re given — paying early only makes sense when there’s a discount worth more than the cost of funding it (see supplier discounts)
When should you fund the gap?
When the free levers have been pulled and the gap is still bigger than your cash — or when a temporary event has stretched it. That’s what working capital finance is for: carrying the cycle, not covering losses.
Match the facility to the shape of the gap:
| Shape of the gap | Facility that tends to fit |
|---|---|
| Opens and closes through the year | Business line of credit |
| Driven by slow-paying business customers | Invoice finance |
| Permanent and growing with the business | Working capital loan or larger facility |
| Large and urgent, with property available | Second mortgage or caveat loan |
Unsecured options for trading businesses typically run from $5,000 to $500,000, sized on turnover and bank statements. With property, $20,000 to $5,000,000 is possible, and $20k to $250k can land the same day.
If you’ve measured your gap and it’s bigger than your buffer, start a 60-second enquiry — we’ll tell you which facility fits its shape.
A simple monthly routine
- Pull aged receivables and payables from your accounting software.
- Recalculate your cycle — has it lengthened?
- Look at the bank balance against the gap.
- Act on the biggest lever first — usually debtors.
- Check your facility covers the next two months, including tax dates.
Business Victoria’s free cash flow forecasting template pairs well with this routine.
How the gap shows up in your bank account
Most owners don’t calculate a cash conversion cycle — they feel it. Signs your working capital gap is bigger than your cash:
- the bank balance is lowest just before customers pay, every month
- you time supplier payments around customer receipts
- BAS and super dates cause stress even in profitable quarters
- you’ve started paying some bills late without meaning to
- you turn down work because you can’t afford to start it
If several of these sound familiar, the calculation will usually confirm what you already sense.
Common mistakes when funding the gap
- Borrowing a lump sum for a recurring gap. It fixes one month, then the gap returns. A line of credit or invoice facility fits better.
- Using the ATO as the buffer. Tax money is not working capital — and ATO interest is no longer deductible.
- Funding losses instead of the cycle. If the business is losing money, working capital finance only delays the problem.
- Sizing to the best month. Size the facility to your deepest realistic dip, plus a buffer.
Measured the gap? Let’s close it
Knowing your gap turns a vague feeling of “never enough cash” into a number you can manage. The next step is finding the right way to carry it. Asking us costs nothing and doesn’t involve a credit check. We don’t pass your details to a stack of lenders; a real person reads your enquiry and calls you with the facility that fits. Give us accurate figures — turnover, the gap and what the business can offer — and the first call will be a useful one. See if your business qualifies.
Frequently asked questions
What is a working capital gap?
It's the amount of cash tied up between paying out for the inputs of your business and receiving payment from customers. Every business with stock or credit terms has one.
How do I calculate my cash conversion cycle?
Add your stock days (how long stock sits before it sells) to your debtor days (how long customers take to pay), then subtract your supplier days (how long you take to pay suppliers).
Why do growing businesses run out of cash?
Because growth increases the cost of every day in the cycle. More stock, more wages and a bigger debtor book all need funding before the extra revenue arrives.
What's the cheapest way to close the gap?
Shorten it: invoice faster, chase debtors, reduce slow stock and negotiate longer supplier terms. Finance should cover what's left, not replace good management.
Which finance suits a working capital gap?
A line of credit for gaps that come and go, invoice finance when slow debtors are the cause, and a working capital loan or property-secured facility for a larger, longer-lasting gap.