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Manage your money (not the other way around).
Working capital is the cash you have each month to cover any expenses. If your overheads are $100,000 a month, and you want 3 months in advance at all times, then your working capital requirement is $300,000.
The essential point about working capital is that it’s the cash required for the day-to-day running of operations.
Generally, the longer the business cycle the more working capital you require. A business cycle is the time taken for a product to be made (or bought in) then on-sold, money received and cleared at the bank. For a hairdresser, this could be few weeks, from when the customer books the appointment to leaving and paying on the way out.
One of the first things to do is decide how much working capital you’ll need. Use a cash flow forecast to calculate when you may run out of cash, and what base level of capital will help prevent that occurring.
The more you can cut down on expenses, the better. In order to manage your working capital effectively, consider the following:
Here are some key areas to consider:
If you can produce accurate cash flow forecasts, you’re going to be in a much better position to see what is happening to your working capital and take steps to improve it before you are forced to. You’ll be able to predict when you need short-term finance to bridge gaps, and when you’re likely to have an increased revenue stream to invest.
Profit and loss forecasts are designed to help you assess the future profitability of your business, so you can make better, clearer decisions about your working capital needs.
Ideally, you’re aiming to reduce any working capital jitters you might have by fully understanding what working capital is, how much your business needs, and ways you can continually improve on it. Once you’ve learned how to effectively manage it and have put these simple processes in place, it’ll become second nature to you, so that you can then focus on growing the business and increasing profitability.
Consult with your accountant about your working capital needs, how you can reduce them, and what you can do to improve them.
Consider updating your payment options so that customers can pay you faster, keeping more cash in your business.
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