![]() ![]() Understanding working capital to maintain business success
If cashflow 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 $150,000Debtors $120,000Stock $100,000Creditors $45,000Taxes 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.
It’s likely your working capital has taken a hit due to Covid-19. 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.
Even with the many challenges of a post-pandemic economy, undertaking regular working capital checks is 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.
|