12 Oct, 2011
Cash and working capital – Jamie Constable
Cash is like blood circulating around a business and one of the reasons businesses fail is that they don’t manage their cash and working capital right.
Cash is King, and Queen…
Now you know this, right? But how many times do you get distracted from the real financial picture or distract yourself from it through inertia and fear?
Businesses need cash to be able to pay staff on time, buy supplies, repay debts on time and to pay dividends etc. If you don’t have cash to pay a supplier when the payment is due, you might find you lose the trust of the supplier and the outlet AND they may declare your business insolvent.
Even profitable businesses can fail because of liquidity or working capital problems.
So, you see, building a successful business is not all about profit although this is of course very important.
You might find this equation helpful: Working Capital = Current Assets minus Current Liaibilies.
Current Assets are cash or something you expect to turn into cash within 12 months and typically include:
- Physical cash
- Bank balances
- Your trade options
- Current Liaibilities include:
- Short term loans
- Unpaid salaries
- Trade payables
- Taxes payables
Schedule time to familiarize yourself with your company’s cash, cash flow, assets and liabilities and review at regular intervals.
Jamie Constable is an EBA Millionaire Mentor