FEATURE could be a red flag and should be a reason to take immediate attention . For example , it could indicate that your collections process is slow , which would show in your accounts receivable .
When you need working capital
There are two main scenarios to evaluate your company ’ s working capital needs : year ( this doesn ’ t include fixed assets , which are considered long-term assets on your balance sheet ). These assets comprise accounts receivable , inventory and short-term investments .
Current liabilities ( including accrued expenses or accrued liabilities ) are short-term liabilities ( debts or accounts ) that you need to settle within a year such as accounts payable , overdrafts , sales tax , payroll expenses and wages .
To ensure positive short-term financial health , you should aim to have more current assets than liabilities or positive working capital . If current assets don ’ t exceed current liabilities , you have a deficit , you might run into cash flow problems and may not be able to pay creditors .
• To keep your business afloat when cash flow is slow .
• To fund growth or big projects .
And if you don ’ t have that working capital , you ’ ll have to find it or risk possible project failure . You could get a bank loan , but the application process takes a while – and even then , approval isn ’ t guaranteed .
The solution is to find funding elsewhere .
How to get working capital / address negative working capital
Here are five ways to raise cash quickly and get more working capital :
1 . Speed up the collection process
Even a profitable business can struggle . Cash may be tied up in assets such as debtors or raw materials and an inability to convert them back into cash signals weak liquidity .
But even after calculating your working capital , how do you know what amount is suitable ? Enter the working capital ratio .
Working capital ratio and what it means
The ratio is a measure of the financial health of your business . The formula is : current liabilities / current assets .
The ratio helps you determine if you have enough operating capital to cover your shortterm liabilities , aka debt . Anything below one indicates negative working capital . Anything above two suggests your business isn ’ t investing excess working capital and assets and has too much cash tied up in inventory , raw materials or debtors .
A ratio of between 1.2 and two is usually sufficient . A declining ratio over the long-term
Working capital shortages often arise due to delays in payments from clients . These delays will lengthen your working capital cycle . Your working capital cycle is the time it takes to convert current assets and current liabilities into cash . A longer working capital cycle means money is tied up in current liabilities and current assets for longer .
Your goal is to reduce that cycle and reduce the amount owed in your accounts receivable . One way you can do this is by investing in solutions and strategies to speed up the collection process :
• Track collection time with clients so that you know which clients are the slow payers .
• Renegotiate payment terms with existing clients , so they pay you sooner .
• Improve your invoicing procedures by investing in tools that help you get paid faster .
• Make payment easy for clients by accepting their preferred payment method , such as credit cards .
• Encourage early payment by rewarding and penalising clients .
• Include the correct details on the invoice to avoid back-and-forth emails that only delay payment .
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