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Working on Working Capital - Dec 1, 2009

Posted by: David Kirkup in Articles

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:

Cash
Accounts Receivable
Inventories
Accounts Payable

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 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 is not available
Slow turnover in Inventory lead to larger investments and risk of obsolescence
Interest incurred or late payment penalties from vendors
Over purchasing

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 you the vital statistics in the areas needed to monitor working capital. For instance, each month you need information on aged receivables, receivable days, inventory levels by category, inventory turnover, and days in payables. These statistics should be 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. B2BCFO 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.