{"id":201404,"date":"2020-12-18T13:37:37","date_gmt":"2020-12-18T21:37:37","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=201404"},"modified":"2020-12-18T13:37:37","modified_gmt":"2020-12-18T21:37:37","slug":"what-is-working-capital-management","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/what-is-working-capital-management\/","title":{"rendered":"What Is Working Capital Management?"},"content":{"rendered":"

Business owners need enough working capital to fund their businesses’ day-to-day operations. If they don’t have enough working capital<\/a>, they’ll have problems meeting their companies’ debt obligations \u2014 and if they don’t manage their debt properly, their businesses could run into trouble.<\/p>\n

So what is working capital management?<\/p>\n

What Is Working Capital?<\/h2>\n

Working capital measures a company’s liquidity. It’s your current assets minus your current liabilities; expressed as a ratio, it’s your current assets divided by your current liabilities.<\/p>\n

Your current assets are your cash, accounts receivable and inventory. Your current liabilities are your payables to suppliers and your short-term debt<\/a> obligations.<\/p>\n

If your current ratio is less than 1-to-1, you’ll have difficulty meeting your day-to-day expenses and paying suppliers on time. A ratio 1.5-to-1 is considered adequate, but 2-to-1 is more comfortable. If you had a 2-to-1 ratio, you’d have $2 in assets for every $1 in liabilities.<\/p>\n

\"A<\/p>\n

Managing Working Capital Between Assets and Liabilities<\/h2>\n

A company’s cash flow conversion cycle is never perfect. The flow of cash from the sale of inventory to accounts receivable to cash on hand can be bumpy. Sales will fluctuate, and not all customers will pay on time.<\/p>\n

On the other hand, your current liabilities are exact. Amounts and due dates are fixed. It’s no mystery when you’ll have to pay your bills \u2014 but when you’ll have enough cash to pay them could be less certain.<\/p>\n

That’s why companies need more money invested in current assets than current liabilities, and why a 2-to-1 ratio is a good target.<\/p>\n

Tracking Assets and Liabilities<\/h2>\n

For effective working capital management,<\/a> track three metrics: cash balance, accounts receivable aging and inventory turnover. Set target numbers for all three, watch for deviations those targets and take the corrective actions necessary to get your working capital back on track.<\/p>\n

For example, if you give customers 30 days to pay their credit and you see the average receipts on those credits creeping up to 35 or 40 days, find out why, then do what you need to bring receivables aging back in line. The more predictable your cash flow, the easier it will be to track your assets and liabilities and achieve that 2-to-1 ratio.<\/p>\n","protected":false},"excerpt":{"rendered":"

Business owners can use working capital management techniques to ensure that their businesses are liquid enoughto meet day-to-day expenses.<\/p>\n","protected":false},"author":26,"featured_media":201403,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23,2,56],"tags":[88,98,62,96,92],"class_list":["post-201404","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-lending","category-financial-health","category-lending-finance","tag-accounting-for-small-business","tag-accounting-tools-for-small-business","tag-featured-post","tag-inventory-management-tools","tag-types-of-small-business-loans"],"yoast_head":"\nWhat Is Working Capital Management?<\/title>\n<meta name=\"description\" content=\"Business owners can use working capital management techniques to ensure that their businesses are liquid enoughto meet day-to-day expenses.\" \/>\n<meta name=\"robots\" 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