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Managing working capital in your FB

WORKING capital can be defined as the difference between your family business current assets and current liabilities.

Current assets are the most liquid of your assets, namely your cash or anything that can be quickly converted to cash. Current liabilities are any business obligations due within one year. Working capital is what you have left over after subtracting the liabilities from the assets.

This can be a positive or a negative amount. If positive, working capital is essential for meeting your business’ operational needs.

It influences your business’ ability to meet its short-term debt obligations in a timely fashion, as well as remain financially viable. Cash flow within the business will not always be the same and making a profit does not always equal available cash.

In short, profit does not equal cash unless that cash is managed well and cash, to use that well-known phrase, is king!

Meeting short-term obligations

This is especially true for family-run businesses that operate on a seasonal basis, as these often require more working capital to stay afloat during off-peak times.

It’s important to ensure that you have enough working capital at any one time to meet your business’ short-term obligations such as buying stock and covering payroll expenses.

Depending on your business goals, you will spend working capital in a number of different ways, including start-up costs, running costs, product purchases, and marketing activities.

If you want to grow your business, you’ll need to manage your working capital properly, and review your cash flow situation on a regular basis to ensure that working capital is available when you need it.

Reduce expenses; increase cash flow

Here are three key tips to help you reduce expenses and increase cash flow so that the money in your bank account matches your working capital needs:

Tip # 1: Just-in-time inventory. Maintaining a large inventory can use up your working capital – instead of stock-piling supplies, rather shift your business to a just-in-time-model. This means you order supplies or products to arrive just when you need them, which helps you avoid over-buying or storing large quantities which might not be necessary for your business.

It also means you will have access to cash should you need it, rather than your capital being tied up in goods. Just make sure you have a back-up plan in case deliveries aren’t made.

Tip # 2: Manage your money. Sales are one thing; cash is another. If cash is not collected for a sale, the sale hasn’t been completed. In order to streamline your cash flow processes, you need to ensure your invoices are sent out as soon as possible after services are rendered, that you have short waiting periods for payments, and finally, that you get paid. The collection of debt is key – the longer it takes for debtors to pay you, the longer you have to finance that sale.

Negotiating credit terms

Tip # 3: Negotiate credit terms. The negotiation of credit terms with clients is vital to ensuring a regular cash flow – if customers don’t pay within the credit terms, they should be charged interest on the outstanding balance. This needs to be made clear up-front and on your invoices so that there is no confusion when it comes to your business’ expectations of payment.

Remember, credit limits should be set for customers based on their financial status or strength. These credit limits should not be exceeded as one large bad debt could sink your family’s business. At the same time, try to stagger your payments to vendors or negotiate more favourable payment terms so that you are able to keep cash within your business for as long as possible.

Ideally the credit terms granted to your customers should be shorter than those negotiated with your suppliers.

For example, 30 days for customers and 45 days for suppliers – this way your business will receive cash generated by sales 15 days before you’re required to pay your debts.

Just think of the payment terms of major retailers – their customers pay cash at the time of purchase and they stretch payments to their suppliers as far as 120 days. In essence, they earn huge interest on their cash takings for 120 days until they have to pay up.

Meet current goals and prepare for the future

Tip # 4: Think about the future. Planning ahead is critical to maintain a healthy store of working capital. Conduct cash forecast that is monitored on a daily basis so you know your business needs. You also need to have an idea of your capital needs for the next year or so – will you need to make alterations to your business premises next year or hire more staff in the coming months? Are you quieter over the December season or will you need to purchase more stock?

Once you understand the patterns of your business, you can set aside the right amounts of working capital to meet your current goals and prepare for future ones. Managing your working capital takes focus and effort but it is an essential part of sustaining and growing your business.


Michael Walls
0407 783 413

Access News is a print and digital media publisher established over 15 years and based in Western Sydney, Australia. Our newspaper titles include the flagship publication, Western Sydney Express, which is a trusted source of information and for hundreds of thousands of decision makers, businesspeople and residents looking for insights into the people, projects, opportunities and networks that shape Australia's fastest growing region - Greater Western Sydney.