Make your business working capital work harder | Business
Accountants calculate a company’s working capital using this simple formula: current assets – current liabilities = working capital. Current assets are all of your business’s cash, inventory, accounts receivable, and sales that can be quickly turned into cash. And your current liabilities are everything you have to pay over the next year, like payroll, mortgage payments, short-term debt taxes, and supplier / supplier bills. Basically, your working capital is what you have left to work on for the year.
As your growth plans accelerate, your need to increase your working capital will also increase, which means increasing what comes in and decreasing what goes out. It all makes sense so far, right?
The question then becomes: how do you calculate the working capital you will need to grow your business? Sharpen your pencils and read on.
A formula for growth
While calculating your working capital is relatively straightforward, figuring out how to make it grow can take a bit of work on your part. Many business owners look at historical data to project where they are, where they want to be, and what they’ll need to get there.
For example, let’s say you sell widgets and you have $ 120,000 worth of widgets in your warehouse. Over the next month, you sell $ 10,000 in widgets and your spend for the month is $ 5,000. This means you have $ 5,000 left for the month. If you multiply that by 12 months, your working capital is $ 60,000.
This assumes that your assets and liabilities are consistent throughout the year. Often times this is not the case due to fluctuating sales, the need to increase or reduce staff, a shortage of parts or products that results in price changes, etc. This is where some forecasting and planning comes in. But for the sake of this example, let’s say your assets and liabilities stay the same.
Continuing our widget example, if you want to grow your business by 10%, you will need to increase your monthly profits by 10%, or $ 500. This would make your working capital $ 66,000 ($ 5,500 / month x 12 months).
How to increase your working capital
If you need to have access to extra cash to fund your inventory and accounts receivable, there are plenty of ways to do it. Depending on your business, goals, and timeline, you may want to incorporate one or more of these tips into your plan:
1. Increase profit margins – To increase your profit margins, you can increase your income by increasing prices by selling more units or reducing costs. If you think your customers might not be able to tolerate a price increase, try negotiating with your suppliers to cut costs or offer volume discounts.
2. Improve inventory management – Track and implement more efficient inventory management to ensure you have sufficient supply to meet customer demands, but not to the point of locking up additional capital.
3. Rework your current debt – Reduce your debt by paying off all the high interest debt you can and consolidating the rest at a lower interest rate.
4. Secure the financing of working capital – If you need access to working capital for payroll, inventory, vendor payment, or any other short-term need, a A Chase Working Capital Loan or Line of Credit may be one solution.
Speak to an investment banker to discuss products that can help you increase your working capital so you can grow your business.
For informational / educational purposes only: The views expressed in this article may differ from those of other employees and departments of JPMorgan Chase & Co. The views and strategies described may not be suitable for everyone and are not intended to be specific advice / recommendations for an individual. The information was obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and / or subsidiaries do not guarantee its completeness or accuracy. You should carefully consider your needs and goals before making any decisions and consult with the appropriate professional (s). Outlook and past performance are not guarantees of future results.
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