Insight into your Working Capital

As a business owner, do you ever feel like your business is growing, but it only gets harder to keep all the bills paid on time? If so, this post’s focus on Working Capital is for you!

Working Capital = Current Assets - Current Liabilities

Current Assets: Assets that can be converted into Cash inflows in the short term - for now, we’ll say 30-60 days. 

• Cash

• Accounts Receivable

• Inventory 

Current Liabilities: Obligations that must be paid with Cash in the short term - again, we’ll say 30-60 days. 

• Accounts Payable

• Payroll

• Loan payments

• Taxes 

In simpler terms, how much cash does the business need to keep operations running on a day-to-day basis? 

Think about your main business cycles: Sales, Purchasing, Payroll, & Inventory. How long does it take for you to collect money from your customers after you have provided the goods or service, and can you collect it sooner? How long can you wait to pay your bills to vendors, and can you extend your terms? How long do you hold on to inventory before you sell it and turn it back into cash? If you have short-term loans, are they worth the interest you pay? 

Truly understanding your cash flow position requires understanding your financial reports first. If you would like an analysis on your particular situation, let us know and we’d be happy to help!