Understanding Working Capital to Maintain Business Success

In simple terms, working capital is the amount of money you have available to run your business and cover your expenses. It’s a measure of your short-term liquidity and reflects your ability to pay your bills, manage your cash flow, and invest in growth opportunities. However, working capital management can be challenging, particularly in times of economic uncertainty, when businesses face increasing pressure to optimize their cash flow and stay afloat. In this blog post, we’ll explore what working capital is, why it matters, and how to manage it effectively to maintain business success. Whether you’re a small business owner or a seasoned entrepreneur, this post will provide you with valuable insights and practical tips to help you optimize your working capital and achieve your financial goals.

If cash flow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.

What is working capital?

Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.

To calculate your working capital: Cash + debtors + stock + work in progress – creditors – taxes owing

For example, if your business had the following balances:

• Cash $150,000
• Debtors $120,000
• Stock $100,000
• Creditors $45,000
• Taxes owing $25,000

Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 – $45,000 – $25,000).

If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent.

Now is the time to review your processes and boost your working capital. Consider the following strategies:

1. Build up enough cash to cover at least 2 months’ sales value.

A key learning from the pandemic was how important it is for businesses to have enough cash in the bank to get them through a major disruption. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level.

2. Renegotiate your debt.

If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt? We can work with you and your bank manager to determine your best finance options.

3. Negotiate with suppliers.

Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They could be in the same situation as you, so work together to agree on the best arrangement that suits you both.

4. Set aside money for taxes.

Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account so you have the cash to cover tax payments as they fall due.

5. Inject sufficient funds.

If the above strategies don’t boost your working capital, you’ll need to invest your own funds into your business to cover your working capital requirements.

Even with the many challenges of a slowing economy, regular working capital checks are an effective way to help increase your business’s cashflow. We can help you calculate your working capital requirements and identify strategies you can implement to increase your working capital.

“Change is not a threat, it’s an opportunity. Survival is not the goal, transformative success is.” – Seth Godin

Don’t Let Economic Insecurity Threaten Your Business

If you’re looking for ways to improve your business’s financial health, regularly monitoring your working capital is essential. Working capital is the amount of money you have available to cover your current liabilities and operate your business. It measures your short-term liquidity and reflects your ability to pay your bills, manage your expenses, and grow your business without relying on external funding.

Don’t wait until it’s too late to take control of your business’s financial health. Monitor your working capital regularly and take action to improve it. Contact us now to discuss how we can help you increase your working capital, boost your cash flow, and achieve sustainable business success. Let’s work together to secure your business’s future.