Cash is oxygen for your business and measuring working capital is your regular health check to keep your business alive – especially in turbulent times. Tradies Tax can help identify strategies to increase working capital.
If cash flow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.
What is working capital?
Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.
To calculate your working capital: Cash + debtors + stock + work in progress – creditors – taxes owing
For example, if your business had the following balances:
- Cash $150,000
- Debtors $120,000
- Stock $100,000
- Creditors $45,000
- Taxes owing $25,000
Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 – $45,000 – $25,000).
If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent.
Now is the time to review your processes and boost your working capital. Consider the following strategies:
- Build up enough cash to cover at least 2 months’ sales value.
A key learning from the pandemic was how important it is for businesses to have enough cash in the bank to get them through a major disruption. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level.
- Renegotiate your debt.
If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt? We can work with you and to determine your best finance options.
- Negotiate with suppliers.
Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They could be in the same situation as you, so work together to agree on the best arrangement that suits you both.
- Set aside money for taxes.
Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account, so you have the cash to cover tax payments as they fall due.
- Inject sufficient funds.
If the above strategies don’t boost your working capital, you may need to invest your own funds into your business to cover your working capital requirements.
How can Tradies Tax help?
Even with the many challenges of a slowing economy, regular working capital checks are an effective way to help increase your business’s cash flow.
Tradies Tax can help you calculate your working capital requirements and identify strategies you can implement to increase your working capital.
Contact Tradies Tax today to discuss undertaking a business health check.
This blog was originally published by The Gap.