How Much Working Capital Does Your Business Actually Need?
Calculate your working capital needs with our simple formula. Learn how to determine the right loan amount for your Dallas business.
Some of the most common questions we hear from Dallas business owners are, “How much cash do I actually need in the bank?” and “Is my current cushion enough?”
Borrow too little, and you are constantly fighting fires instead of growing. Borrow too much, and you waste valuable profit paying interest on money that just sits there.
The reality is starker than most realize. A recent JP Morgan Chase Institute report found that the median small business holds only 27 cash buffer days in reserve. That means most businesses are less than a month away from running out of money if revenue stops.
We want to help you move from “surviving the month” to “funding the future.” Let’s break down exactly how to calculate the working capital number that keeps your business safe and ready to scale.
The Basic Working Capital Formula
At its core, working capital represents the liquidity available to run your daily operations. You calculate it with a simple subtraction:
Working Capital = Current Assets - Current Liabilities
Current Assets include:
- Cash and liquid bank balances
- Accounts receivable (unpaid invoices owed to you)
- Inventory (raw materials and finished goods)
- Prepaid expenses (insurance or rent paid in advance)
Current Liabilities include:
- Accounts payable (bills you owe suppliers)
- Short-term debt payments (due within 12 months)
- Accrued expenses (wages, sales tax)
- Taxes payable
If your assets exceed liabilities, you have positive working capital. When the reverse is true, you have a gap that must be filled immediately to avoid insolvency.
The Hidden Trap in “Current Assets”
Many business owners make the mistake of taking their asset number at face value. We often see balance sheets where “Current Assets” look healthy, but the cash isn’t actually accessible.
- Aged Receivables: If a client hasn’t paid in 90 days, that money isn’t “current”—it’s a collection problem.
- Dead Inventory: Stock that has sat on your shelves for six months shouldn’t be counted as a liquid asset.
You must discount these “zombie assets” to get a true picture of your liquidity.
The Working Capital Ratio
A quick health check is the working capital ratio (also called the current ratio). This number tells you if you can pay off your short-term debts with your short-term assets.
Working Capital Ratio = Current Assets ÷ Current Liabilities
While the general “rule of thumb” says a ratio of 1.2 to 2.0 is healthy, we have found that this varies wildly by industry. A construction company needs a much higher ratio than a restaurant because of how slowly they get paid.
Target Ratios by Industry (2025 Benchmarks)
| Industry | Target Ratio | Why It Differs |
|---|---|---|
| Construction & Trades | 1.5 - 2.0+ | You pay for materials/labor upfront but wait 60-90 days for checks. |
| Retail & E-commerce | 1.2 - 1.6 | Inventory ties up cash, but credit card sales settle quickly. |
| Restaurants | 1.0 - 1.2 | You collect cash immediately (low AR), so a lower ratio is safe. |
| Professional Services | 1.2 - 1.5 | Low overhead, but reliance on invoicing creates gaps. |
If your ratio is below 1.0, you are in the “danger zone” and likely relying on expensive short-term debt to pay bills. If it is above 2.0, you might be hoarding cash that could be better invested in expansion or marketing.
Calculating Your Working Capital Gap
To determine exactly how much additional capital you need, you cannot just look at the bank balance. You must calculate the time lag between spending money and making money.
Step 1: Calculate Your Cash Conversion Cycle
This cycle measures the number of days your cash is tied up in operations before it comes back to you as profit.
Days Inventory Outstanding (DIO) = Average Inventory ÷ (Cost of Goods Sold ÷ 365)
- How long does stock sit before selling?
Days Sales Outstanding (DSO) = Average Accounts Receivable ÷ (Revenue ÷ 365)
- How long do customers take to pay?
Days Payable Outstanding (DPO) = Average Accounts Payable ÷ (Cost of Goods Sold ÷ 365)
- How long do you take to pay suppliers?
Cash Conversion Cycle = DIO + DSO - DPO
Step 2: Calculate Daily Operating Costs
Add up your average daily expenses to keep the doors open:
- Payroll (Annual payroll ÷ working days)
- Rent (Monthly rent ÷ 30)
- Inventory purchases (Daily average)
- Utilities and software (Daily average)
Step 3: Multiply by Cycle Days
Working Capital Need = Daily Operating Costs × Cash Conversion Cycle
Example Calculation: The Dallas Distributor
Let’s say a local distribution business has daily operating costs of $2,500. Their customers are slow to pay, resulting in a 45-day cash conversion cycle.
Working Capital Need = $2,500 × 45 days = $112,500
This business needs permanently accessible working capital of $112,500 just to keep the lights on while waiting for payments.
Factors That Increase Working Capital Needs
Your base calculation is just the starting point. We advise clients to adjust their “need number” based on four specific factors that are impacting US businesses right now.
1. Inflation and Rising Input Costs
The cost of doing business isn’t static. In 2025, material costs in sectors like construction and auto repair have continued to rise. If your Cost of Goods Sold (COGS) increases by 10%, your working capital need increases proportionally—even if you don’t sell a single extra unit.
Adjustment: Add 10-15% to your base calculation to account for price volatility.
2. The Construction “Payment Lag”
Construction firms face a unique challenge known as “retainage,” where clients withhold 5-10% of the project fee until completion. Industry data shows the average Days Sales Outstanding (DSO) for construction is now over 80 days.
Adjustment: If you are in trades, calculate your needs based on a 90-day cycle, not 30.
3. Seasonal Fluctuations
A retailer stocking up for the holidays needs triple the capital in October than they do in January. You need cash to buy inventory months before the revenue from those sales arrives.
Adjustment: Calculate your needs based on your peak inventory months, not your average.
4. Growth Plans
Growing businesses consume cash faster than stable ones. New customers mean more accounts receivable; new locations mean more inventory and payroll before the first sale is made.
Adjustment: Calculate working capital needs based on your projected revenue for next year, not your current revenue.
The Buffer Rule: How Much Safety Do You Need?
Financial advisors often recommend a “3 to 6-month” emergency fund, but that is a personal finance rule, not a business one. Holding 6 months of cash is often inefficient for a growing company.
We recommend a tiered approach based on your risk profile:
- The Survival Buffer (1 Month): The absolute minimum. This covers the JP Morgan “27-day” average and protects against a single bad month.
- The Operating Buffer (3 Months): The standard for stable businesses. It allows you to weather a lost client or a supply chain delay without panic.
- The Growth Buffer (5+ Months): Required if you are launching a new product line or opening a new location where revenue is uncertain.
How Much Should You Borrow?
If your calculation shows a gap, financing can be the bridge. The goal is to match the loan type to the specific need.
Loan Matching Matrix
| Your Need | Best Financing Option | Typical Cost (APR Estimates) |
|---|---|---|
| Short-term Cash Flow Gap | Business Line of Credit | 7% - 15% (Bank) |
| Purchasing Equipment | Equipment Financing | 6% - 12% |
| Large Expansion / Working Capital | SBA 7(a) Loan | 10% - 13% (Variable) |
| Seasonal Inventory Buildup | Short-term Term Loan | 8% - 18% |
Don’t Just Fill Today’s Gap
If you need $50,000 to cover payroll this week, borrowing exactly $50,000 is risky. We suggest borrowing enough to cover the gap plus a 20% contingency. It is far easier to get approved for a larger amount when you don’t desperately need it than to ask for a second loan two months later.
Account for Repayment
Working capital loans require repayment from future cash flow. You must ensure that your projected profits can cover the monthly loan payments without draining the working capital you just borrowed.
Example: You borrow $100,000. If the payment is $2,500/month, your business must generate $2,500 in excess free cash flow every month to service the debt safely.
Tools to Automate the Math
You don’t have to rely on back-of-the-napkin math. Several modern tools can plug directly into your accounting software to give you a live view of your working capital needs.
- LivePlan: This tool is excellent for building full business forecasts. It integrates with QuickBooks and Xero to compare your actuals against your plan, helping you spot working capital gaps months in advance.
- Fathom: We love this for visual reporting. Fathom takes complex data and turns it into clear “Cash Flow Waterfalls” that show exactly where your money is getting stuck (e.g., in inventory vs. receivables).
- QuickBooks Cash Flow Planner: If you already use QuickBooks Online, their built-in planner uses historical data to predict cash lows over the next 90 days. It is a simple, no-cost way to start forecasting.
Ready to Calculate Your Needs?
The right working capital amount is not a guess—it is a calculated number that supports your specific cycle, industry, and growth goals.
- Cover your cycle: Ensure you can fund the gap between spending and collecting.
- Build your buffer: Aim for at least 3 months of operating expenses.
- Plan for shocks: Add 10-15% for inflation and cost increases.
Use the formulas above to find your number. If you discover a gap, or if you want to secure a line of credit before you need it, getting pre-qualified is your next step.
Our team can look at your specific situation to help you structure the right financing solution.
