A buyer writing on Searchfunder about his first months after closing described learning this the slow way. His business bills once a month, on the last day. Checked on the 25th, working capital looked low. On the last day of the month, after billing, it was at its peak. The number to plan around, he concluded, was the peak, not the day you happen to look.
He is right, and it applies to most small businesses.
Why working capital moves through the month
Net working capital is roughly what customers owe you, plus work in progress and inventory, less what you owe suppliers. Each of those moves on its own calendar.
Billing adds to receivables when invoices go out. A business that bills once a month adds a month of revenue to receivables in a day.
Collections reduce receivables as customers pay, usually spread over the following weeks.
Payroll takes cash out every week or two, regardless of when customers pay.
Supplier payments fall due on their own terms, which rarely line up with collections.
The result is a cycle. At some point each month, the business has paid out the most and collected the least. That is the peak.
How to find your peak
Lay the month out on a calendar. Mark when you bill, when your largest customers typically pay, when payroll runs and when the main supplier payments fall. Then measure receivables, payables and cash at each of those points over several months.
For a business that bills once a month, the peak is usually just before the bulk of collections arrive. For one that bills continuously, it may shift through the month and need checking more often. Seasonal businesses have a second, longer cycle on top.
What the peak decides
Cash to hold. The cash balance has to cover the peak need with a margin, not the average.
Credit line size. A line of credit is the natural tool for a predictable timing gap. Size it to the peak, and check that its terms let you draw and repay within the month.
Account transfers. If you split cash across accounts for tax, payroll or profit, timing matters. Money in the wrong account on the wrong day can look like a cash shortage when it is a scheduling problem. More frequent transfers, timed to the cycle, often fix it.
Keep watching it
The peak moves as the business changes. New customers on longer terms, a supplier who shortens yours, or a growing payroll will all raise it. A 13-week cash forecast rebuilt weekly shows the peak coming rather than arriving.
What finding the peak will not fix
It will not reduce the need. To lower the peak, you have to change the cycle: bill more often, collect faster, or agree longer supplier terms. Measuring the peak tells you which of those would help most.
Frequently asked questions
Why does working capital change during the month?
Because billing, customer payments, payroll and supplier payments each happen on their own schedule. Receivables, payables and cash rise and fall through the month as each one occurs.
What is peak working capital?
The highest working capital requirement in a business's cycle, usually the point where it has paid out the most and collected the least. Cash and credit should be planned to cover it.
How should a line of credit be sized?
To cover the business's peak working capital need with a margin, and with terms that allow drawing and repaying within the cycle.
How do I find when my working capital peaks?
Map when you bill, when customers pay, when payroll runs and when suppliers are due, then measure receivables, payables and cash at each of those points over several months.
Where CFOLogic fits
We map the working capital cycle, find the peak and set cash, credit and transfer schedules around it. Navigator, our software, rebuilds a rolling 13-week cash plan every morning from the books and payroll, so the peak shows up weeks ahead.