Think Cash Tip - 2
What is working capital? It is a phrase we use whenever our funds are low. But do we really know what it actually means.
When accountants use it they are referring to "Net Current Assets" which are your companies short term assets less your short term liabilities.
To make this easy let's assume that you have £1,000 of stock, you are owed £500 by your customers and you have £200 in the till. This means that your short term assets are £1,700, unfortunately at the same time you have £1,000 of bills to pay, which are described as your Short Term Liabilities.
Therefore your working capital, or your Net Current Assets, are £1,700 less £1,000 being £700.
Naturally, you would assume that the more working capital you have in your company the safer your company is, but this is not always true. If too much of that working capital is in stock, it is dead money; which comes alive when sold and then can be used to buy new stock.
Just recently a large furniture retailer went into liquidation even though it had no major debts, because all its money was in furniture and no one was buying their furniture, this led to a major cash flow crisis and its eventual demise.
So to Think Cash you must look where your money is and whether it is working for you. This is why before Christmas all the major retail chains were giving such big discounts, as it is no good having money in stock, if you don't have cash to pay your staff and your regular bills.
The message is, if your stock isn't selling, sell it at any price and use that money to buy stock that will sell.
Words 290
© Tony Dalton - author of Cash Management published by A & C Black ISBN 978-0-7136-7706-5
This is one of a series of 300 word tips on cash flow that are available for publication at no cost to the media
