Putting your working capital to work

What is working capital, and why does it matter how you use it? Every business asset at your disposal becomes an essential piece of the entrepreneurial puzzle. When you prioritize working capital management, you can get the most out of your assets to maximize every dollar.

Working capital is the money a business has on hand to help meet day-to-day operations. To calculate working capital, add up total assets and subtract current liabilities. The money “left over” is what you have at the ready to reinvest or meet expenses.

There are four main components to working capital:

1. Cash and cash equivalents
2. Accounts receivable
3. Inventory, including raw materials and stocked products
4. Accounts payable

Companies rely on working capital management to analyze those four components and figure out how to utilize them as effectively as possible.

Estimating your future sales and expenses is the first step in working capital management.

Know your starting point

Start by looking at accounts to see what’s presently available. How much cash is available if you chose to make a withdrawal or transfer?

Predict future income and expenses

Use your historical business data to predict what cash flow will be like in the future. Year-over-year data can be useful, as are tax records, rent receipts, vendor records and wage and salary ledgers.

Use conservative estimates

It’s generally best to be conservative, estimating cash flow on the lower side to mitigate risk of overspending.

One of the biggest changes in working capital over the last couple of decades is the introduction of technology, including systems and platforms that make it easier to monitor cash flow and streamline operations.

Help optimize payment terms and collections

It can be challenging to get customers to pay on time, but incorporating tools like recurring payments or providing multiple ways to pay can remove several of the most common invoice-related hurdles. With digital payments, you can even extend days payable terms without further delaying payment or shortening your own cash flow.

Scale spending up or down via on-demand IT resources 

Rather than bundling all services into a single package, raising overhead across the board, provide IT resources on demand so you’re only generating expenses when it’s absolutely necessary. You’re likely already doing this by making use of a public cloud provider to only pay for the data center resources you need.

There are numerous benefits to having a risk management program, one of which is the ability to avoid or deftly deal with adverse events if or when they occur. Everything from ensuring regulatory compliance to strategic planning can help protect the company and the bottom line.

Implementing a contingency plan for unexpected expenses

One of the best ways to ensure success is to have a business plan that helps build resilience and agility.

Have an emergency fund

Cash on hand is great, but an emergency fund adds depth and security that’s crucial when the unexpected suddenly becomes reality. From small bumps in the road, like a temporary slump in sales, to something more major, like a natural disaster, issues that compromise cash flow can be handled far faster if you have financial backup.

Review your insurance coverage

As part of risk management and overall planning, review insurance coverage and evaluate whether minimum coverage or a more comprehensive plan are better for the future.

Have a good line of credit

When cash on hand and emergency funds are exhausted, having a line of credit already established is far more useful than having to apply for one when time is of the essence. While withdrawals should be strategic, the ability to fund an important investment quickly or rapidly increase inventory to meet soaring demand can mean the world for a business ready to scale.

Working capital is an important concept for any business looking to help optimize operations today while preparing for a successful tomorrow. Understanding current assets, future projections and everything in between can help you leverage what you have and construct a plan to reach goals with as few hiccups as possible.

Seeking entrepreneurial inspiration? See how Coastal Ridge Real Estate’s relationship with Capital One helped power growth even during a pandemic.