First, a clarification, because the question hides a trap. Working capital is a balance sheet measure: current assets minus current liabilities. What most people actually mean when they ask this is simpler and more useful. How much cash should I keep accessible so a slow month does not become a crisis? That is your cash buffer, and it is the number worth setting deliberately.
There is no universal figure. There is no magic number. But there is a well-worn starting point, and a way to calculate your own.
The rule of thumb
Most experts recommend holding three to six months of operating expenses in reserve. Three months if your revenue is steady and recurring. Six months or more if it is lumpy, seasonal, or concentrated in a few large clients.
Calculate your number in three steps
Step 1. Add up your essential monthly operating expenses: payroll and super, rent, insurance, loan repayments, core software. The costs you cannot switch off. Leave discretionary spend out of this.
Step 2. Multiply by your target months. If you spend $80,000 a month and want a four month buffer, your target is $320,000.
Step 3. Check what you actually hold. Take current assets minus current liabilities, divide by your daily operating cost, and you have the number of days your working capital would cover. Compare that to your target and you know the gap.
Adjust for your reality
Steady recurring revenue and an undrawn line of credit let you sit at the lower end. Long debtor days, seasonal swings, or one client making up a big share of revenue push you higher.
In Australia right now, factor in the current squeeze: Payday Super and the cluster of July ATO obligations mean you want enough to clear that window without reaching for expensive credit.
Keep it separate
A buffer mixed into your operating account is a buffer you will spend by accident. Hold it in a separate high-interest account, and keep GST, PAYG and super quarantined in their own pool.
You can hold too much
One warning most advice skips: there is such a thing as excess cash. Undercapitalisation is the obvious risk, but too much cash sitting idle past roughly six to twelve months of expenses is capital not working. Whether that means paying down debt, funding growth, or returning it to owners depends on the business. The goal is not to hoard. It is to be deliberate.
The honest answer
The honest answer to “how much” is not a fixed dollar figure. It is enough to cover the gap you can foresee, plus a margin for the one you cannot, held somewhere you will not touch by mistake. Calculate it, review it each quarter, and adjust as the business changes.
If you are seeing warning signs that your current position is already strained, start with the gap between your target buffer and what you actually hold. That tells you how much breathing room you need to build.
This is a general framework rather than advice for your specific situation, so test the number against your own forecast and the Director’s appetite.
Control should happen before money is spent, not after.
