Why Your Business Should Master Working Capital Management
Following this essential best practice ensures that you have cash when it’s needed most.
Working capital (also known as net working capital) is the bread-and-butter cash with which you fund the costs of doing business for the week, month or quarter. It keeps your firm safe, secure, and running at its best.
Each type of business uses working capital differently. For restaurants, working capital buys the food in its cupboards and refrigerators. In a construction firm, it may fund the cost of building materials and extra hires for the next big project.
The better your working capital management, the better armed you are to face the most common business crises — economic or seasonal downturns, natural disasters, and more. Having cash on hand is especially critical for a newer small business. In fact, "running out of cash" remains the top reason for failed startups, according to a study from research firm CB Insights. Understanding and forecasting your operating cycle is a great defense against adverse business conditions.
How operating cycles impact working capital
"Operating cycle" is the time between the purchase of inventory or raw materials and receiving revenues from those purchases. (See illustration.) Cycles vary greatly among industries. A restaurant, by the nature of its business, has a short operating cycle. In contrast, a construction business may need to wait months or longer to realize returns on its equipment and payroll outlays on a job.
Four ways to speed the operating cycle
The shorter the cycle, the bigger the boost to your working capital. You can put these tactics to work to shorten that time gap between doling out cash for various expenses and reaping revenues:
Ask suppliers for longer payment terms. Going from Net 45 to Net 60 will have a quick and positive impact on working capital availability.
Shorten receivables’ payment terms. Include a small discount to sweeten the deal.
Empower managers. Task the people you’ve put in charge of purchasing, production and other applicable cost centers to explore more cost-efficient management of those processes.
Apply for working capital financing. Options include traditional secured and non-secured bank loans, SBA loans, and fintech lending solutions. Requirements vary.
Seasonal businesses: Extra vigilance required
The more seasonal your business, the more planning you’ll need around working capital. If you manage a clothing store in a college town, for instance, you may get a burst of business in September, then another jump around the holidays – with slow times in between. This calls for additional working capital planning.
In September and December, when sales tick up, you’ll be flushed with working capital. By allowing cash to build up during these peak sales seasons, then deploying it in the operating cycle during slow months, you’ll be taking the reins on your working capital. Even during the slow months, smart cuts to payroll and inventory can lessen the blow of lower sales figures and free up working capital.
Working capital management is essential to short- and long-term business health. Smart planning to ensure you have enough of it will ease those inevitable rough spots on the road to success.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
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Subtract your liabilities from your assets, it’s that simple. But be sure to include these items in each of those categories: Assets: Cash, inventory, raw materials and finished goods, accounts receivable, securities, money market funds. Liabilities: Debt, accounts payable, vendor notes, and unpaid accounts.