Closely watch rise and fall of your working capital

Tips For Small Business

October 19, 2008|By Stephen L. Rosenstein

Working capital is the difference between current assets and current liabilities. Lack of close control on working capital is one cause of business failure. The small business owner must be constantly alert to changes in working capital, the reason for them, and any resulting business implications.

It is helpful to think of working capital in terms of six components:

1. Cash and equivalents. The most liquid form of working capital requires constant supervision. Among considerations: whether the cash level is adequate to meet current expenses; timing of cash inflow, cash outflow and peak cash needs; amount to borrow to meet cash shortfalls; and the timing of repayment of loans.

2. Accounts receivable. Almost all businesses extend credit to their customers. Make sure your accounts receivable are reasonable in relation to sales and that receivables are being collected promptly.

3. Inventory. Inventory often constitutes as much as 50 percent of a firm's current assets. Is the inventory level reasonable compared with sales and the nature of the business?

4. Accounts payable. Financing by trade is common in small business and is one of the major sources of funds for entrepreneurs. Understand whether your company's payment policy is helping or hurting your credit rating.

5. Notes payable. Notes to banks or other financial sources represent a popular alternative financing source. Look at whether the amount of borrowing is reasonable compared with the equity financing of the company.

6. Accrued expenses and taxes payable. These are obligations of the company at any given time and represent expenses already obligated, even if payment is not yet used.

Stephen L. Rosenstein is co-chairman of the Greater Baltimore SCORE Chapter No. 3. Call 410-962-2233 to speak to a SCORE counselor or visit www.scorebaltimore.org. To send a question to SCORE, e-mail smallbiz@baltsun.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.