Does your business have working capital problems? Let’s take a look at what working capital involves. Basically working capital falls into four main areas. These are:
- Accounts Receivable
- Accounts Payable
Most companies would say “yes, they have a problem in one of these areas.” Why? Because these factors most affect how a company can operate. Face it, if you don’t have cash in the bank, accounts receivables from sales, inventory to sell, and payables for the purchase of inventories, you are basically out of business. Therefore, these factors should be monitored very closely and on a regular basis.
There are many reasons why a business will have working capital problems. As a business owner, it is critical for you to determine why the situation exists, and correct the problem(s) immediately. So how do you determine why you would have working capital problems? Here is a short list of some of the usual causes of this issue.
- Not enough sales, therefore not enough cash
- Past due receivables are increasing
- Customers are paying short, due to quality issues
- Staff has been added to process orders and/or invoices
- Detailed information on inventory not available
- Inventory turnover problems
- Interest incurred or late payment penalties from vendors
To avoid problems in working capital, the business owner should spend time carefully looking at what is going on in the business at this level. At the end of every month, a “financial dashboard” should be prepared for the business owner that gives him/her the vital statistics in the areas needed to monitor working capital. For instance, each month a report should be produced showing information such as aged receivables, inventory levels by category, inventory turnover, and days in payables. These statistics should be looked at and compared month by month to determine if the problem is getting better or worse. Action should be taken immediately when the numbers show a trend that will be bad for the company.
Monitoring working capital is not a difficult thing to do. A simple report put together every month will focus management in the right areas, and help to move the business into better times. I can help business owners monitor their working capital by putting together simple, easy to understand reports that get to the heart of the matter. Tackle this problem early, and working capital will not be a problem.