Working Capital: How Much Do I Need?
Understanding working capital is key to understanding cash flow. As I mentioned in my last blog, I’m going to be sharing with you some proven methods that have helped companies obtain positive results in cash flow and profit.
The 5 methods I’ll be sharing with you are:
1. Unlocking the Secret of Your Cash Flow
2. Working Capital – How Much Do You Need?
3. Profit Does Not Equal Cash
4. The Secret: Your Financial Score Card is Not Secret
5. My Favorite “F” Word
Last week, we talked about unlocking the secret of your cash flow. This week, we’ll discuss how much working capital you need to obtain positive results in cash flow and profit.
#2 Working Capital: How Much Do I Need?
What is Working Capital (WC)? You may know that bankers use this to quickly calculate liquidity. However, for running your business it’s VITAL to know that Working Capital is how you can fund your operations, especially during times of growth.
Businesses can FAIL even during times of increased revenues and profit if they don’t have sufficient Working Capital. Calculating the required WC for growth is critical to success – so that you can borrow the correct amount for growth OR temper your growth to limited Working Capital (ensuring that you stay in business).
To calculate your current Working Capital, review your latest Balance Sheet: Current Assets minus Current Liabilities. Now calculate your current required Working Capital: Average Daily Sales X Cash Operating Cycle in Days. If your requirements are greater than your Current Working Capital, you’ll need to make decisions to ensure you have enough cash.
For growing businesses, calculating the amount of WC required to fund the growth is the same calculation as above, but using your forecasted pro forma Balance Sheet and Income Statement instead of historic numbers.
If you’d like to learn more about all 5 sooner rather than later, give me a call or send me an email and we can set up a time to meet.