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How Much Working Capital Does Your Business Really Have?

0 Comments | Feb 20, 2014 | Written by:

Tips for Managing Your Assets and Liabilities

Working capitalEvery business needs working capital, but not every business owner knows how much of it their company really has. At its base level, the amount of working capital your business has is based on its revenue and how it manages its assets and liabilities.

Once you have mastered managing your assets and liabilities, you will be in a better position to accurately gauge the amount of money your business has to work with so you can make the most informed decisions possible. Here are some important tips that might be able to make managing your assets and liabilities a little easier.

Managing Business Assets

A business’s assets include any cash income generated by the business and any other items that can be quickly converted to cash if the need calls for it. Examples of business assets include, but are not limited to:

  • Cash and deposit accounts
  • Accounts receivables
  • Inventory
  • Pre-paid expenses (like insurance policies)
  • Short-term investments

While company vehicles, equipment, and real estate also fall under the assets umbrella, they are usually not able to be quickly liquidated for cash so they are usually not included in a working capital calculation.

How you manage the above assets plays a significant role in how much capital your company can rely on. For instance, it is crucial to accurately assess your inventory so you always know how much you have tied up in your stock supply. It is equally as important to ensure that all of your invoices are being paid on time because a single late payment can send your accounts receivables into turmoil, the aftereffect of which can bleed into your daily operations.

Managing Business Liabilities

Your business liability is the amount of money you owe to your creditors and suppliers. These expenses eat away at your working capital so it makes good business sense to keep them to a minimum. Here are some helpful tips for successful handling of these accounts so you can minimize your risk and keep your business credit healthy.

  1. Set due date reminders on your calendar for any invoice or monthly bill. Set the reminder for a week in advance with another reminder set for the day before and then yet another on the actual due date. Paying your liabilities on time every month is essential for keeping costs down and your credit rating up.
  2. In the event that you have multiple accounts with one creditor, then you should specify which account you are paying on whenever you make a payment as the funds can easily be misapplied if you do not.
  3. Contact your creditors the moment you believe your cash flow cannot support one of your due payments. Starting up a conversation with them about a temporary cash flow problem may be able to help you work out a solution that you both can be happy with so your credit isn’t ruined by a missed payment.

Keeping an Eye on the Cash You Have

For all intent and purposes, the amount of cash you have on hand at this moment should never decline. When you manage your assets and liabilities well, your business should be able to operate solely on its monthly revenue with some type of profit left over after all of your liabilities are satisfied. Only by keeping a steady eye on the cash you have and by proper management of your assets and liabilities will you truly know how much working capital your business has.

[Photo Credit: smallbusiness.wa.gov.au]

 

Author:

Dave Donovan is a freelance writer and owner of Donovan Copywriting. He has more than seven years of experience as a professional writer, editor, and proofreader. Dave has written extensively for the web with a primary focus on articles targeting finance and business.