Managing Your Working Capital: A New Entrepreneur’s Guide

If you’re starting a new business, you’ll have plenty of things to wrap your head around. Not everything needs to be done perfectly to keep your business moving forward. However, some areas do demand more of your focus, particularly the management of your working capital.

Your business’s working capital is the difference between its current assets and current liabilities. Working capital is usually expressed with the following formula:

Working Capital = Current Assets – Current Liabilities

To put it in simple terms, working capital is the cash your business has on hand for day-to-day operations. This short-term nature distinguishes working capital line items from other financing activities with a wider scope.

---

How to Find Your Business’s Working Capital

Identify Your Business’s Current Assets

In normal practice, current assets include any asset that can be converted into cash within a year. Examples of common current assets include:

• Cash and cash equivalents like digital wallets and cryptocurrency funds 
• Accounts receivable
• Inventory
• Prepaid expenses

Note that cash from business banking loans from a banking provider like Maya and other similar borrowings is considered a part of financing activities, not operations. As such, it is not normally included in the calculation of working capital and should be accounted for separately.

Identify Current Liabilities

Current liabilities are obligations that your business must pay off within a year. Typical line items for current liabilities include, but aren’t limited to, the following:

• Accounts payable
• Short-term debt
• Accrued liabilities
• Taxes payable

Apply the Formula

Simply follow the formula for working capital by subtracting your business’s total current liabilities from its total current assets. If you need help arriving at the exact numbers, you may want to consult a professional from the finance sector.

Interpret the Results

The results of the formula can return either a negative or positive figure. A positive number indicates that your business has enough cash to cover any short-term obligations, suggesting that it is in good financial health. A negative figure, on the other hand, may indicate ongoing liquidity problems.

---

Tips to Manage Your Working Capital

Keeping your business’s working capital positive will allow it to avoid many of the risks associated with failing short-term obligations, such as work interruptions, financial penalties, and a damaged reputation. In the short term, managing this financial metric properly ensures business continuity. Over the long term, consistently maintaining a positive working capital will increase external confidence in your business, thus opening up new avenues for funding, investment, and profitability. 

All the same, achieving this can be trickier than you might expect. Let’s explore some of the common strategies that you can successfully use to keep your working capital in the green:

Keep Your Short-Term Financing Options Open

Short-term financing options like lines of credit, business credit cards, and special business banking loans can help bridge temporary cash flow gaps. However, these options won’t always have favorable terms, making it important to find the products that match both your needs and repayment capabilities. 

Once you do commit to any short-term financing, repay the borrowed funds promptly to avoid high-interest costs and to avoid more expensive loans later on.

Maintain and Monitor Your Cash Flow

Cash flow is widely considered to be the most critical ingredient of a growing business. As a general rule, you’ll want to make sure that you have enough positive inflows to guarantee a healthy working capital as well as profitability. Set up regular cash flow monitoring with accounting software so that you can better anticipate cash shortages and make corrective decisions before any problems occur. 

Speed Up Accounts Receivable Collections

Collections need to be a priority since delivering your product or service to your customers necessarily incurs business costs that must be recovered. To encourage prompt payment from your customers, try offering discounts for early payments. Next, integrate invoicing software or email automation to send customers reminders for overdue payments. 

With particularly difficult collections, consider offering forgiveness for a partial payment and simply avoid dealing with the same customer. To reduce the risk of bad transactions across the board, conduct credit checks on new customers and do not close any deals without informing them of your credit policies.

Negotiate Favorable Credit Terms

In case you need loans, you must prioritize having good relationships with your lenders and suppliers. With a better relationship, you can more easily negotiate better credit terms in the future. This will help avoid expensive production stoppages and may allow you to sell your products before your bills are due.

Optimize Your Inventory Management

Holding too much inventory ties up your cash, and keeping too little results in missed sales. Explore integrating an automated inventory management system to help you maintain optimal inventory levels and avoid either of those risks. Regularly review your inventory to identify slow-moving items and adjust your purchasing strategy as needed.

Review Your Operating Expenses

Lastly, identify areas where you can cut costs without negatively affecting your product or service quality. Typical strategies you can try include automating or outsourcing non-core activities and focusing instead on whichever areas you do best. You can also consider trying more targeted marketing strategies and implementing energy-saving practices to reduce your running overheads.

---

Don’t Hesitate to Ask for Help

Managing working capital in addition to everything else in your business is not going to be easy. What’s more, what works for one business may not necessarily work for you. 

If you aren’t an accountant, the best thing you can do to maintain your business’s financial health is to seek advice from vetted accountants and financial advisors. With their help, you should be able to better execute the strategies suggested above and keep your working capital position primed for better things.