Working Capital notes
Working Capital is the additional capital a business has to carry to manage its day today operation. Usually a business has to pay its suppliers before it receives payment from customers. Such business are said to be carrying positive Working Capital. Now a days, big retail businesses like Apple and Amazon collect payments from customers immediately on selling a good and release payments to good supplier after one or two years. In other words they are getting cash in their operating cycle at zero interest from suppliers to run their business. Such business are said to be operating in negative Working Capital.
Need for managing Working Capital Requirement (WCR)
Almost all the small business are having positive Working Capital Requirement (WCR). The owners of these business should keep a focused eye on their Working Capital Requirement (WCR) movements weekly or monthly. They should attempt to keep the Working Capital Requirement (WCR) levels constant or reduce it over time. If they are able to reduce the Working Capital Requirement (WCR) levels then the surplus amount can be used for supporting business growth. Otherwise while growing the business they will have to arrange for additional capital to keep their percentage Working Capital Requirement (WCR) constant.
An example
Recently while working with a client, I challenged him to reduce the Working Capital Requirement (WCR). He hit back at me and asked me to reduce his business Working Capital Requirement (WCR). I knew that this will happen one day. My wife always told me that preach what you can do otherwise do not preach. And I never disobey my wife. So, I was preaching something which I could do. I accepted the challenge. I looked at 3 sub-measures which impact the Working Capital Requirement (WCR).
- Inventory turn over - number of times inventory has to be filled in a year
- Average collection period
- Average payment period
My goal was to- a) increase inventory turn over time, so that burden of inventory investments lowers during the year and also results in higher efficiency with which business manages its inventory b) Accelerate payments from customers c) delay the payments of suppliers without spoiling long term relations.
In my client’s business, changing Average collection period and Average payment period was difficult as both customers & suppliers were big players in the market. The only handle I had was to increase the inventory turn over time. I looked at ordering schedule of business. I looked for opportunities to order in small chunks without affecting the cost price of goods. Fortunately, I could increase the inventory turn over time for the business.
Closing thoughts on working capital notes
In short, Working Capital Requirement (WCR) monitoring is essential for operational efficiency. I recommend to all proprietors and owners of business to monitor their business Working Capital Requirement (WCR). In case you need help, connect with me and I will be at your service to help you in your growth journey.
Request for sharing
What is your businesses Working Capital Requirement (WCR) - positive or negative? Are you seeing it periodically? Please share your experiences on how you are raising capital for your firms growth.