Wheatpeak Lenders, a small-business funding broker in Lewiston, Idaho, sets out a by-hand way to size a working capital need: map the days between paying out and getting paid, total the costs in that window, and subtract cash on hand. Nearly half of Nez Perce County employers had fewer than five employees in 2023, so the math is usually simple.
Why small businesses should size it themselves
In 2023, 588 of Nez Perce County's 1,213 employer establishments, or 48.5%, had fewer than five employees (County Business Patterns 2023). Businesses that size rarely have a controller to model cash flow. The owner knows the numbers, though, and a few lines on paper are enough.
Step 1: measure your cash cycle
Count three intervals, in days, from your own records:
- Days to sell: how long stock or materials sit before they become a sale. Service businesses with no stock can enter zero.
- Days to collect: how long customers take to pay after the sale or invoice.
- Days to pay: the stretch between a supplier's invoice and the day you settle it.
Your cash cycle is days to sell plus days to collect, minus days to pay. That is how long your own cash is tied up.
Step 2: total the costs inside that window
Add up what goes out every month regardless of sales: wages and payroll taxes, rent, insurance, utilities, loan payments, and stock or materials you must buy to keep working. Divide by 30 for a daily figure, then multiply by the cash cycle.
Step 3: a hypothetical worked example
Hypothetical figures, not an offer or a typical case. A small Lewiston, ID cabinet shop with three employees:
| Item | Figure |
|---|---|
| Days to sell (materials to finished job) | 21 |
| Days to collect (invoice to payment) | 38 |
| Days to pay suppliers | 15 |
| Cash cycle (21 + 38 - 15) | 44 days |
| Monthly fixed costs plus materials | $31,350 |
| Daily cost (31,350 / 30) | $1,045 |
| Cash tied up (1,045 x 44) | $45,980 |
| Cash on hand set aside | $19,400 |
| Gap to cover (45,980 - 19,400) | $26,580 |
The shop's honest working capital need is about $26,580, not a round number picked because it sounded safe. A partner reviewing that figure will want the bank statements and invoices that support each line.
Two adjustments most owners forget
- Growth: if sales are rising, the cash tied up rises too, because you buy more stock and carry more invoices. Re-run the numbers with next quarter's expected costs, not last quarter's.
- One slow payer: if one customer accounts for a large share of invoices and pays late, calculate days to collect for that customer separately. One account can stretch the whole cycle.
Both adjustments can move the figure more than any rounding.
Service businesses with no stock
A Lewiston, ID bookkeeping practice or repair service may have no inventory at all. Set days to sell to zero and the method still works: the gap is days to collect minus days to pay, times daily costs. For many service firms, wages dominate the daily figure, which is why payroll is the usual reason they call.
Step 4: decide whether it is a one-time or a repeating gap
If the gap appears once, say for a single large job, a fixed-term working capital product fits. If it reappears with every job, a business line of credit you draw and repay may cost less over a year. To see what fixed monthly payments on a given amount might look like, try the payment calculator.
Payroll and the cabinet-shop example
Yes. Wages are the most common reason small businesses need working capital, and in the example above they make up most of the monthly costs. A partner will check that the revenue the payroll produces will arrive in time to repay.
Before you call
Bring your three day-counts, your monthly cost total and recent bank statements. The four steps explain what happens next, and other posts are on the blog.
By Wheatpeak Lenders · Updated