Working capital … what is it?
Working capital is the difference between the current assets and the current liabilities in your business.
Gotcha. So what does that mean?
Your assets are your stock, debtors (money owed to you) and cash. The money your business owes are the liabilities
The ‘current’ is accounting-speak, and means anything that can be realised within 12 months. So long-term mortgages and loans have no impact on working capital.
And why does it matter?
It reflects on your business ability to repay it’s bills. In simple summary if you have more cash, stock and invoices raised than you owe out – you have a positive working capital, which is a good thing.
If however your business owes more money than it can realise from stock, cash and invoices raised – you have a negative working capital which is a bad thing. Businesses in this situation can expect to have present or future funding issues.
I see… Is this the same thing as cashflow?
Not quite. Cashflow refers only to the flow of cash through your business.
So if you get paid sooner, cash comes into your business sooner, so you have more cash available. Similarly if your suppliers let you take longer to pay, so your cash in the business increases.
What do I need to out for?
The three things that could lead to cashflow pressures are:
1. Paying your suppliers sooner.
2. Allowing your customers longer to pay you
3. Holding more stock, or taking longer to sell your stock.
That’s great. So in summary…?
Make sure your business has positive cashflow to be able to pay your business bills.
And make sure your business has positive working capital to be able to afford the bills.