Working capital is the blood of your business!

How much money do I need in my bank to run my business? This is a question many small business owners grapples with!

Working Capital is the amount of cash, and access to money you have at short notice. Liquid cash ensures your business can pay its bills. How quick depends mostly on the type of business, it’s cash flow and production operating cycle. I

Larger businesses can get by with a temporary negative working capital. This is because they can raise funds quickly. Small businesses need to maintain a comfortable level of liquid assets to operate stress-free. A good working capital means you have money for the unexpected.

Your working capital operates in cycles. Seasonal fluctuations will mean there is a greater pull on resources. Plan your cashflow squirreling away moneys for tough times.

Woking Capital timeline

Here is an example of how a working capital timetable can operate. The lower days the better!

Map out how your working capital line operates.

  • Working capital in simple terms is the cash on hand used to keep a business operational on a daily weekly or monthly basis,
  • Depending on your business, your funding or capital needs may be significant to meet supplier obligations!
  • Those businesses that don’t need a high level of stock can rely less on requiring a vital working capital balance and can operate with less overhead costs.

What Is Working Capital mean?

For a small business, it is the difference between your businesses current assets and its current liabilities. Working capital is also known as Current Ratio. In simple terms it represents the amount of cash available to be utilised in a business at any one time.

Lets talk about what items are “current” on your Balance Sheet.

Current assets are items the business owns and can liquidate quickly. Identify assets can be turned into cash within the next 12 months or quicker.

Examples include stock and cash reserves.

A word of warning about your working capital requirements

Stock is regarded as a current asset convertible to cash. Should your stock needs to be realised in a hurry, you may not always obtain full value. If you are desperate for cash selling stock of at cost or below is where the saying “fire sale comes” into play.

Current liabilities are the costs and expenses the business incurs within the same 12 month period and are generally reoccurring liabilities. These may include suppliers, payroll and taxation

A business working capital level or days is a reflection of its operational efficiency and budget management. A business that has more current liabilities than assets, will have a negative working capital.

The result is ultimately this impact on profitability and long-term stability of the business.

This means your business may have difficulty meeting its financial obligations in the short term.

Factors that influence the level of working capital you need:

  1.  business type,
  2. operating cycle and
  3. management goals.

The type of business you operate will impact on the need for larger day to day funding.

Businesses that hold or produce physical stock on the floor often need considerable more amounts of cash in the bank. Where as Manufacturers must plan so they can buy raw materials. They will need to purchase raw materials to produce inventory often months ahead . Whereas, retailers and wholesalers may have to purchase pre-made stock for sale to distributors or consumers or import from overseas. Importers face problems of freight and other holdups in Ports.

Those businesses that are seasonal in nature resulting in a need for high working capital during certain times of the year.

E.g seasonal business such as pool suppliers, snow, and winter products.

How much cash should I have available?

A small business should be able to pay its short-term debts with revenue from sales. Understanding your current asset ratio and your cash-flow requirements will assist your working capital planning. Money will sometimes be tight, e.g. after Christmas and BAS lodgements. Cash is king and it is at these times when working capital and cash is essential.

In real terms, it takes time from the start of the production to create and sell a product . Working capital days will flows based upon the time until you bank the money. One suggestion is you hold a % of turn over as working capital

As an example a $500,000 turn-over you would ideally like to keep $30,000 to $50,000.

Those sucessful small businesses like to hold more. Some base cash holdings by holding two months rent and wages in the bank at all times.

For some small businesses, it’s impossible to do that and the way to overcome this is to inject capital or take a bank overdraft.

An alternative, is utilise an unsecured loan. Unsecured loans interest rats will be higher as they are normally offered by the non banks

Business Goals help with profitability

Your goals as the business owners, is an essential ingredient that determines the amount of working capital you need.

If your small business is new, and looking to expand, it will require a higher level of working capital.

Gartly Advisory offers help with our profit check program that allows clients to guide through short term funding needs and profitability.

Eventually, you will know exactly how much working capital you need. As your business grows or changes so too will your working capital. The best way to understand your cash needs is to actively monitor your business trends . Then will you be in a better position to have a full appreciation of the cash you need.

Call Now

Share This