subject: How To Manage Working Capital [print this page] In order to understand the management of working capital, it is important to know the definition of working capital.
Contemporary Definition
A measure of both a small businesss efficiency, and its short term financial health: The working capital ratio is calculated as :
Working Capital = Current Assets = Current Liabilities
Positive working capital means that small businesses currently are unable to meet its short- term liabilities with its current assets (cash, accounts, receivable and inventory)
Explanation
If a small businesss current assets do not exceed in its current liabilities, then it may run into trouble paying back creditors in the short term. Worse scenario to put forth is- bankruptcy. A declining working capital ratio over a longer time period could also be a red light that warrants further analysis. For example, it could be that the small businesss sale volumes are decreasing and as a result, its accounts receivables number continues to get smaller and smaller.
Working capital also gives investors an idea of the small business underlying operational efficiency. Money that is tied up in inventory or money used to pay off any of the business obligation. So if the small business is not operating in the most efficient manner, it will show.
Small Business Case Study
Take simplistic case, a spaghetti sauce small business uses $100 to build up its inventory of tomatoes, onion, garlic, spices etc. A week after that, the checks arrive from customers. That $100, which has been tied up for two weeks, is the small business working capital. The quicker the company sells the sauce, the sooner the business can go out and buy new ingredients which will be made into more sauce and sold at profit.
If the ingredients sit in inventory for a month, small business cash is tied up and cant be used to grow the spaghetti business. Even worse, the business can be left strapped for cash when it needs to pay its bills and make investments. Working capital also gets trapped when customers do not pay their invoices on time or suppliers get paid too quickly or not fast enough.
Excel In Management Of Small Businesss Working Capital
To keep the car running you need fuel, to keep your working capital you need cash flow. Merchant Advisors has helped numerous small businesses since 25 years. With an extensive range of funding programs theyre able to customize a plan that gets you the funding you need, when you need it, and at an affordable price. All you have to do is free up your working capital by factoring outstanding invoices, by purchasing some of your future credit card receipts at discount or by creating a customized business loan.
The race is not over yet, because I havent won yet. Prepare to win the battle of small business in working capital with Merchant Advisors. Visit http://www.onlinecheck.com today and get motivated for a successful journey.
