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Manage For Profit

Managing a business for profit requires continuous reinvention and a watchful eye for signs of decline.

Congratulations, you survived the roller coaster of the building and growing your business. It’s important to continue with a growth mindset, however, today’s business environment requires constant reinvention to stay competitive. As you enter the Manage for Profit or maturity stage of your business life cycle, cash flow and profitability create a solid foundation. From a track record of annual growth to loyal employees and predictable revenue, this is the time to acquire other businesses, introduce new product lines, or consider selling the company to investors. Here you’ll find articles, guides and tools to help you avoid complacency in your success and stay vigilant for other opportunities or signs of trouble.

Understanding and improving working capital

Nikki Roser

By Nikki Roser

Nikki Roser is the President of First Bank. She runs and oversees all aspect of the company’s day-to-day operations, is a CPA and holds an MBA. She’s passionate about building relationships with entrepreneurs and business owners in Southeastern Illinois and Southwestern Indiana and leverages her experience to share financial and strategic advice. Partnering with clients and watching their business thrive and prosper is her greatest joy.

What is working capital? Working capital is the money available to meet your short term (12 months or less) payment obligations. So, to calculate working capital, you simply take the difference between your assets that you can convert to cash in the next 12 months and what you will have to pay in the same time frame. If you have an excess of assets over liabilities, you have positive working capital. Working capital is important to a business because it provides the cash needed to operate the business throughout the business cycle. This diagram is what a typical working capital operating cycle might look like.

Working Capital Cycle

Generally, the longer the business cycle the more working capital your business will require. The business cycle is the length of time it take to turn current assets, such as inventory and accounts receivable, into cash. The longer it takes inventory to move or accounts receivables to be collected, the longer the business cycle and the greater the working capital needs. One of the first steps in improving your working capital, is to understand how long your business cycle is and how much working capital you will need. The working capital needs can be determined by calculating the overhead cost for the length of the business cycle, this is what you will need to fund operations.

There are various alternatives to help manage the working capital cycle. One method is to contribute owner's equity. The owner can choose to inject capital into the business or possibly apply for a loan to help fund operations. Another alternative is to manage accounts payable. Suppliers often offer terms that might better match the operating cycle. These should be utilized where possible. In addition to these, managing accounts receivable and inventory turns will also help to provide cash more quickly. It is critical to manage these appropriately as they can get out of hand quickly and cause cash flow issues for the business.

A best practice is to create both cash flow and profit and loss forecasts. This will provide you with projections that will help to better manage the working capital and determine if there is seasonality or peaks and troughs with your needs. Your accountant can assist you with this.

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