Explaining working capital
Before business owners can improve their working capital, it’s important that they understand just what it is. Getting to grips with working capital and how it affects your business is one of the most fundamental aspects of successful business ownership, and here at Meridian, we can help you do just that.
Briefly, working capital’s what cash a business has each month to cover any expenses. So it’s easy enough to explain. What you’re looking to do is learn how to apply it to your business on a daily basis. Even if your business is profitable, there might still be working capital concerns.
And of course, the goal of all business owners should be to improve their working capital, so you’ve got more cash to grow your business.
Easy-to-understand tips for improving working capital
- Once you’ve got to grips with what working capital is, the next step is learning how to improve it. Improving working capital means having more money left at the end of the month than the previous month. In this way, you can gradually build up cash reserves. We’ve got some simple tips to help you do that, things that should become fundamental processes in your business.
- Understand your business cycle. Do you have cash coming in and going out daily, or are you on a seasonal cycle that sees a return only at the end of the season? Deciding on how much working capital you’ll need will depend on your cycle.
- Reduce your working capital needs. Avoiding large personal withdrawals, being careful not to over-trade, reducing inventory costs and making it easier for your customers to pay you are all good ways to reduce how much capital you’ll need.
- Conduct a cash flow forecast. If you’re new to business, you’ll probably need some help with this task. We’ve got guides and templates that can assist you if you’re new to the process. The more accurate your forecasts are, the better position you’ll be in to see what’s happening to your capital.
Check your financial health, using quick test ratios such as the Working Capital ratio, Quick Asset or Liquidity Ratio, and the average rate of stock turn. If you’re unfamiliar with these tests or how to conduct them, contact us so we can assist you.
What you’re looking to do is reduce any working capital jitters you might have by fully understanding what working capital is, how much your business needs, and ways you can continually improve on it. Once you’ve learned how to effectively manage it and have put these simple processes in place, it’ll become second nature to you, so that you can then focus on growing the business and increasing profitability.
