A lack of working capital can be the determining factor to a business’s success or failure.
It is at the heart of every thriving business, from a local, sustainable farmer to a gin distiller.
- Which assets and liabilities are accounted for?
- What is Working Capital Management?
- How to improve it
Working capital is a cash balance, positive or negative and shows the difference between current assets and current liabilities. Put simply, it is the cash your business has left, after you account for money coming in and money going out over the net 12 months.
For example, if a company’s balance sheet shows total assets of £100,000 and total current liabilities of £70,000, then its working capital is £30,000.
See also: Finance jargon busting for UK SME’s
Which assets and liabilities are accounted for?
Current assets include:
- Short term investments
- Accounts receivable
- Pre-paid expenses
- Cash held in current and savings accounts
Current liabilities include:
- Accrued income taxes
- Deferred revenue
- Accrued expenses
- Accounts payable
- Materials and supplies
What is Working Capital Management (WCM)?
WCM is the reflection of the results of various business activities Such as, debt management, revenue collection, payment to suppliers and inventory management.
Efficient WCM can help to maintain smooth operations and improve the company’s profitability.
How to improve WCM?
- Shorter invoicing terms
- Improve inventory management
- Enforce late payment penalties
- Work with suppliers to reduce costs
- Credit checking potential customers
- Manage expenses better
- Issue pro-forma invoices on certain customers
Working capital is the lifeblood of any business. If managed poorly, it can lead to the demise of a company.
Getting a better grip and awareness on the finances across all departments of a business can improve your success with managing working capital.