Working Capital’s New Rules
Tom O’Leary, Managing Director and CEO of Iluka Resources, a mineral sands producer, recently highlighted a shift in business strategy with his statement: “Suspending production at Cataby and SR2 is prudent in dealing with the present demand uncertainty in mineral sands and positioning for recovery.
It reflects the discipline that is a long-standing feature of Iluka’s approach.” Traditionally, working capital discipline focused on minimising inventory and accelerating collections. Production shutdowns were seen as operational failures.
However, O’Leary’s approach reframes mine suspension in Western Australia as a strategic financial decision – preserving capital during unpredictable demand cycles and positioning for future recovery.
Businesses are moving away from strategies designed for predictable cash flow cycles. They’re opting instead for approaches that prioritise flexibility and resilience.
This shift isn’t merely a temporary adaptation to crises but a fundamental restructuring driven by supply chain volatility, unpredictable customer payment behaviours, and the misalignment of seasonal patterns with historical norms.
Regulatory frameworks are now transforming resilience from a competitive advantage into a licensing requirement.
This transformation is evident across three operational layers: restructuring lending facilities, rebuilding institutional banking products, and evolving payment infrastructure.
Companies clinging to outdated optimisation formulas risk embedding vulnerability into their capital structures.
This vulnerability underpins what I call the predictability collapse – the breakdown of assumptions that once made working capital optimisation reliable.
The Predictability Collapse
Traditional working capital optimisation relied on assumptions that no longer hold true. Foundations once built on reliable supply chains, seasonal payment rhythms and accurate forecasts have crumbled.
Supply chain lead times can double or halve without notice. Customer payment cycles shift as their businesses face volatility. Inventory turnover rates no longer adhere to historical seasonal curves.
These changes aren’t temporary disruptions. They reflect structural shifts. Global supply chains have been deeply altered. Customer payment preferences have permanently shifted.
Economic conditions create ongoing uncertainty. The relationship between past patterns and future performance has been severed. Businesses that minimised inventory now face stockouts during supply chain disruptions.
Those that extended payables damage supplier relationships needed for flexibility. Those that accelerated receivables find customers unable to pay on compressed timelines.
The paradox of efficiency optimisation in volatile environments is stark. Strategies designed to minimise working capital become sources of vulnerability when patterns become unpredictable.
Apparently, following every best practice guide was the perfect recipe for fragility. Old formulas fail because they assume stability; volatility requires a different approach.
Businesses can no longer forecast with confidence, making efficiency metrics designed for predictable environments counterproductive.
Regulatory authorities have recognised that working capital fragility creates systemic risks. This is particularly concerning in sectors like construction, where undercapitalised businesses can trigger cascading failures.
As a result, regulatory responses are codifying new requirements to address these vulnerabilities.
Regulatory Enforcement of Resilience
The Queensland Building and Construction Commission’s Minimum Financial Requirements show how regulatory frameworks are enforcing working capital resilience.
These requirements include a minimum 1:1 current ratio, adequate net tangible assets, and sufficient working capital to support maximum revenue. Failure to meet these levels can result in licence suspension or cancellation.
This makes resilient working capital a prerequisite for legal operation rather than a competitive advantage.
The Reserve Bank of Australia’s endorsement of the Australian Prudential Regulation Authority’s decision to maintain macroprudential settings further shapes the lending environment.
The Council of Financial Regulators plays a crucial role in proactively managing emerging stability risks by actively managing financial vulnerabilities through monitoring lending practices. This directly impacts the funding environment in which businesses operate.
Australian banks have reduced their reliance on offshore funding from 25% in 2007 to just over 10% by June.
This strategic pivot from short-term offshore wholesale debt to more stable domestic household deposit funding reflects a shift from cost optimisation to stability optimisation.
As unpredictability increases rollover risk, banks themselves prioritise resilience over efficiency. This creates a lending environment where businesses’ funding sources reflect the same shift they experience in operations.
Regulatory frameworks enforce new standards while traditional optimisation strategies fail. It turns out regulators spotted the resilience memo while businesses were still optimising spreadsheets.
Businesses are operationalizing these requirements at the facility level by redesigning funding arrangements to accommodate volatility.
Redesigning Covenant Architecture
Traditional facility structures often penalise volatility through covenant breaches, margin calls, and restructuring costs.
Facilities designed around projected average performance become liabilities when results fluctuate, even if businesses remain sound.
Point-in-time testing, single-target working capital lines, and security structures assuming stable inventory and receivables levels are inadequate.
A structural shift is required. We’re moving from facilities testing performance at fixed points to structures accommodating expected variance. Covenants are being designed to test performance over rolling periods rather than single snapshots.
Working capital lines are calibrated to seasonal ranges rather than single targets. Security structures recognise that inventory and receivables will fluctuate significantly.
The goal is to align facility terms with businesses’ actual volatile cash generation patterns rather than idealised forecasts.
Martin Iglesias, a Credit Analyst at Highfield Private since January, provides one example of this approach.
With over two decades of experience in cash flow modelling, covenant design, and structured finance at Australia and New Zealand Banking Group and Commonwealth Bank of Australia, he supported an online retailer’s expansion from a mid-market scale to a $250 million operation.
This required forward-looking cash flow analyses and inventory/receivables controls to calibrate working capital lines and term funding.
A critical element was negotiating facility terms with lenders to match seasonal cash cycles, recognising that the business would experience significant working capital requirement fluctuation throughout the year.
This prevents covenant breaches during predictable low-cash periods and supports the principle that covenant structures must accommodate expected variance rather than penalise normal fluctuation.
Covenant structures requiring minimum working capital levels and periodic testing mirror regulatory frameworks like Queensland’s licensing requirements mandating capital adequacy.
Both acknowledge that businesses need structures supporting them through variance rather than treating fluctuation as failure.
Iglesias’s facility restructuring work demonstrates how lending architecture itself is being redesigned for the new rules – replacing covenant and drawdown mechanisms optimised for stable performance with structures treating volatility as baseline and providing flexibility businesses need to maintain operations through unpredictable cycles.
However, redesigning individual facilities isn’t sufficient; the institutional banking products that support these structures must themselves be rebuilt around flexibility rather than stability assumptions.
Banking Products for Volatility
Traditional bank working capital products were designed as one-size-fits-all solutions for stable, predictable businesses.
However, small and medium-sized enterprises now operate in environments where quarter-to-quarter volatility is standard rather than exceptional. Products built for stability create problems when businesses’ actual performance fluctuates.
A transformation is required to move beyond treating volatility as an exception requiring waivers and amendments.
New design elements include seasonal adjustment capabilities built into product terms, covenant structures recognising normal business rhythms rather than penalising deviation, and approval processes evaluating businesses’ capacity to manage variance.
Challenger banks less constrained by legacy systems can design products reflecting current market realities rather than historical patterns.
Chris Bayliss provides one example of this approach as CEO and Managing Director of Judo Bank since March 2024.
With 38 years of international banking experience including leadership roles at Standard Chartered and NAB, his expertise in Business Credit Risk Management and SME Business Banking positions Judo Bank to innovate working capital strategies focusing on flexibility and resilience in the face of economic uncertainty.
As CEO of a bank specifically focused on SME business banking, Bayliss represents an institutional commitment to products accommodating rather than penalising business volatility.
Just as Australian banks rebuilt funding structures to prioritise stability – significantly reducing offshore reliance – Bayliss leads Judo Bank to rebuild SME products around resilience.
Institutions apply the same resilience-first approach to their own balance sheets and to products offered to businesses.
Bayliss’s leadership at Judo Bank represents institutional product-level transformation, where working capital solutions are being rebuilt to treat flexibility as an embedded design element rather than requiring businesses to justify every deviation from forecast – operationalising resilience at product architecture level and demonstrating banks themselves recognise old efficiency-optimised templates no longer serve businesses’ actual operating environments.
Yet product flexibility extends beyond lending facilities to encompass the payment infrastructure that determines when cash actually becomes available to businesses.
Payment Infrastructure Evolution
The speed at which customer payments convert to available cash directly affects working capital requirements.
Acceleration reduces the capital needed to bridge the gap between sale and cash receipt; delays increase it. Payment systems that process and settle transactions determine these timing dynamics.
Modern payment platforms enable faster settlement than traditional banking rails, provide more payment options affecting customer behaviour, and create data visibility helping businesses forecast receivables timing.
These aren’t marginal improvements – they change the cash conversion cycle businesses must finance.
While faster payment infrastructure can improve working capital positions by reducing days sales outstanding, it also creates new considerations around transaction costs, customer payment preferences, and integration between payment systems and working capital management.
Jon Davey provides one example of this evolution as Group CEO of Tyro Payments Limited since October 2022 and Managing Director since September 2023.
With over 25 years of experience in technology-enabled businesses specialising in digital platforms, payments, and banking, Davey’s leadership has seen Tyro expand into new verticals including aged care and pet insurance.
This demonstrates how payment infrastructure providers adapt to serve diverse industries with different working capital cycles.
Different verticals have distinct customer payment behaviours and timing requirements, which means payment infrastructure evolution changes the cash conversion cycle businesses must finance.
Tyro’s expansion into aged care and pet insurance reflects payment infrastructure adapting to diverse cash conversion cycles, making one-size-fits-all approaches obsolete.
Different industries experience volatility in different ways – seasonal for some, episodic for others, random for still others – and infrastructure serving varied patterns must build in flexibility to accommodate these differences.
Davey’s leadership at Tyro shows how payment infrastructure evolution has become a working capital management tool, with faster settlement capabilities, expanded vertical coverage, and improved data visibility changing dynamics of receivables management – supporting the thesis that working capital’s new rules extend beyond financing and banking products to encompass the infrastructure through which cash flows.
Global Transformation of Working Capital
Visa’s 2025–2026 Growth Corporates Working Capital Index based on insights from 1,457 CFOs and treasurers across 23 countries confirms that Australian businesses are participating in a global transformation.
Working capital is being reconceived from a buffer to minimise into a strategic asset to optimise for growth and resilience.
A key finding is that working capital is now viewed as “a growth engine rather than just a buffer,” representing a shift in how financial leaders conceptualise liquidity.
This reframing moves working capital from being a defensive resource against shocks to an offensive capability enabling opportunity. Apparently, yesterday’s liability is today’s strategic advantage – finance leaders love a good rebrand.
Finance leaders are deploying digital tools, AI, and corporate cards to unlock savings and manage market volatility, with average savings reported at $19 million.
A 64% increase in the likelihood of using corporate cards for unplanned growth demonstrates that working capital tools are selected for flexibility – capacity to respond to opportunities emerging unexpectedly – rather than purely for cost efficiency.
The two CFO profiles identified by Visa mirror the dual approach seen in Australian adaptations: structured finance professionals building long-term resilience frameworks through covenant architecture designed for variance; payment platforms enabling tactical responsiveness through infrastructure accommodating diverse cash cycles.
The Resilience Premium
Building working capital resilience carries real costs that reduce immediate returns and constrain capital deployment.
Buffers reduce immediate returns; redundancy ties up capital; designing for volatility means accepting lower efficiency ratios than optimisation for stable conditions would produce.
The Business Council of Australia, led by chief executive Bran Black, has vowed to “resolutely oppose” a proposed 5% cash flow tax on companies with revenue exceeding $1 billion.
The tax recommended by the Productivity Commission would affect large companies like BHP Group and major banks while smaller businesses would benefit from company tax rate reductions from 25–30% to 20% for firms under $1 billion revenue.
Increased focus on cash management and working capital resilience comes with trade-offs. Business leaders are concerned that additional cash flow taxation would further constrain capital available for investment and growth.
When businesses are already building larger buffers and maintaining more working capital cushion while accepting lower efficiency ratios to achieve resilience, new taxes on cash flow hit directly at the resources they’re trying to preserve.
Perfect timing – tax the cash just as everyone’s learning to hoard it.
The question isn’t whether to optimise working capital – it’s what to optimise for. Maximising efficiency in predictable environments made sense when businesses could forecast with confidence.
Maximising resilience in unpredictable environments is sound management adapted to actual conditions. These financial constraints make every capital deployment decision carry increased weight.
Resilience as the New Efficiency
When businesses face cash flow constraints and regulatory pressures, disciplined choices like Iluka’s production suspension at its Western Australian mines become essential strategic moves rather than operational retreats.
Businesses haven’t abandoned optimisation; they’ve redefined what optimisation means. Efficiency measured in days of inventory or payables outstanding mattered when patterns were predictable.
Flexibility measured in ability to weather unexpected shocks matters now when those assumptions no longer hold true. In this environment, resilience isn’t the opposite of efficiency – it’s efficiency correctly defined for volatile conditions.
The real question is whether you’re optimising for the world that exists or the one you wish did.
