If cashflow is the lifeblood of your trade or construction business, then working capital is the regular health check that helps keep your business strong.
For builders, electricians, plumbers, painters, civil contractors and other trade-based businesses, working capital is especially important. Projects often involve upfront costs for materials, wages, subcontractors and equipment well before the final payment comes in. In times of rising costs, project delays and economic uncertainty, keeping a close eye on working capital can make the difference between staying in control and running into cashflow stress.
What is working capital?
Working capital is the difference between your current assets and your current liabilities. In simple terms, it shows whether your business has enough short-term funds available to keep operating without needing to sell assets, take on more debt or inject personal funds.
A healthy working capital position gives your business more flexibility to:
- cover wages, suppliers and subcontractors on time
- absorb delays in customer payments
- manage rising material costs
- take on new projects with confidence
- handle seasonal slowdowns or unexpected setbacks
For trade and construction businesses, working capital is typically calculated as:
Cash + debtors + stock/materials + work in progress – creditors – taxes owing
Example: working capital in a construction business
Let’s say your business has the following balances:
- Cash: $150,000
- Debtors: $120,000
- Materials/stock: $100,000
- Creditors: $45,000
- Taxes owing: $25,000
Your working capital would be:
$150,000 + $120,000 + $100,000 – $45,000 – $25,000 = $300,000
That means you have a $300,000 buffer available to support day-to-day operations.
However, if instead of having $150,000 in cash, the business had an overdraft of $150,000, the working capital would fall to zero.
That would leave no room to deal with:
- slow-paying clients
- project delays
- cost blowouts
- higher stock or materials on hand
- unexpected repairs or equipment costs
For a trade or construction business, that can quickly become dangerous, particularly when payroll and supplier accounts still need to be paid every week.
How to improve working capital in your trade or construction business
Now is a good time to review your processes and strengthen your working capital position. Here are some practical strategies.
1. Build up enough cash to cover at least 2 months of turnover
One of the biggest lessons from recent years is the importance of having cash reserves. For trade and construction businesses, disruptions can come from weather delays, labour shortages, supply chain issues or clients delaying payment.
A good target is to hold enough cash to cover at least two months of average sales or operating costs, depending on your business model. Review your average monthly income and outgoings over the last six months and work towards building a buffer that can carry your business through a difficult period.
2. Review and restructure debt where needed
If you rely heavily on an overdraft or short-term finance, it may be worth reviewing whether some of that debt should be converted into a term loan. This can reduce pressure on day-to-day cashflow and give you more certainty around repayments.
It’s also worth asking:
- Is your current finance structure still right for the size of your business?
- Are you using short-term debt to fund long-term assets like vehicles or equipment?
- Could better finance terms improve your cash position?
We can help you assess your funding options and work with your bank or lender to find the right solution.
3. Negotiate better supplier terms
Materials, equipment and subcontractor costs can put major pressure on cashflow, especially when you need to pay before your own client has paid you.
Speak with your suppliers to see whether you can arrange:
- longer payment terms
- better pricing for consistent volume
- early payment discounts
- staged payment arrangements on large orders
Strong supplier relationships can make a real difference to working capital, particularly during busy growth periods.
4. Stay on top of debtors and progress claims
For trade and construction businesses, unpaid invoices and delayed progress payments are one of the biggest drains on working capital.
Review your invoicing and collections process:
- invoice as soon as work is completed or milestones are reached
- follow up overdue accounts quickly
- make sure progress claims are accurate and submitted on time
- collect deposits upfront where possible
- use clear payment terms in your contracts
The faster you turn completed work into cash, the healthier your working capital will be.
5. Set aside money for GST, PAYG and other taxes
Tax obligations can catch businesses out, especially when cash has already been used to fund jobs, wages and materials.
Work out what percentage of your sales should be set aside for GST, PAYG withholding, super and income tax, and transfer that money into a separate account regularly. This helps ensure tax payments don’t create a sudden cashflow crunch when they fall due.
6. Monitor stock and work in progress carefully
In construction and trade businesses, too much money can get tied up in materials sitting on site, unused stock, or jobs that are partly completed but not yet invoiced.
Regularly review:
- slow-moving or excess stock
- materials purchased too early
- jobs that are progressing but not being billed promptly
- variations that haven’t been invoiced
Good project management and timely billing are essential to keeping working capital under control.
7. Inject funds if required
If the above strategies are not enough, you may need to contribute additional capital to support your business. While this is not always the preferred option, it may be necessary to protect the business and ensure it can continue to operate safely and profitably.
Don’t wait for cashflow problems to appear
In trade and construction businesses, cashflow issues can build quietly in the background — especially when sales look strong but profits are tied up in debtors, stock or work in progress.
Regular working capital checks can help you spot problems early, improve cashflow and put your business in a stronger position to manage uncertainty and grow sustainably.
If you’d like help reviewing your working capital, forecasting your cash needs or improving your processes, we can help you identify practical strategies tailored to your business.
“Change is not a threat, it’s an opportunity. Survival is not the goal, transformative success is.” — Seth Godin
