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Working capital

May 27, 2018

 

 

Do you know what your business working capital is? If not, do not worry, you are not alone. Many small business owners find it difficult to work out. Of course you can make guesstimates, or simply look at what is left in your bank account, but it is actually a little more complicated than that.

 

So how can you work out what your working capital is?

 

Firstly you must understand what is meant by working capital. Working capital is your current assets less your current liabilities. In simple terms, it is the business' equity. It is important to understand what your working capital is and to track it regularly. Why? Because this is the money your business needs for its day to day operations and if you run out of money, that can only mean one thing, and no one wants to be in that position.

 

Every business will have a different working capital requirement. Here are the key areas to look at:

  • Customers – who owes you money

  • Suppliers – who do you owe money too

  • Stock - what stock do you have

 

As part of understanding your working capital, you must learn your operating cycle. The operating cycle is simply the journey your money takes. The cycle can be shown over a number of days to provide a more accurate reflection of how money flows through your business.

 

Let’s take a look at an example;

A company buys materials on day 1, they make the product on day 7, they sell it on day 15 and they get paid on day 23. This means the working capital cycle is 23 days.

 

Here are our tips to manage your working capital:

  • Have realistic goals for sales and profit, not just what you want them to be

  • Look at planning cash flow in advance. Know when you need to buy larger items and plan for this

  • Find out about short term and long term financing for times when you might need it the most

  • Keep track of your expenses and maintain good accounting records

If you think you may need some extra support with understanding your working capital or your operation cycle, then get in touch with PBT today.

 

We are here to help you grow your money tree.

 

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