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Managing your Working Capital


According to the most up to date stats from Equifax, there are more than 18 million small companies in the US.

A high portion of those small business owners are digging into individual cost savings, taking out home equity loans, obtaining from friends and family and adding charge card expenses as their way of obtainging working capital and trying to manage their working capital needs. Managing working capital may take most of a business person’s day. One of the hardest jobs is coming up with the payroll due in 2 days, or paying the creditor who is just about to put you on COD for materials.

There are many ways to manage your working capital. Traditionally, businesses have looked to banks for lines of credit. This is a good option for the business that needs money on a seasonal basis, to boost inventory at a particular time of year; or for a business with a larger than usual contract to complete, that needs financing for a short time. In fact, lines of credit are designed for short term financing — to supplement the working capital of a business periodically throughout the year.

They are not supposed to be “evergreen” — for use on a more or less permanent basis.

Not every business qualifies for a traditional loan with a bank. Regulatory concerns have made this option less available to smaller businesses. It is usually best for a business to apply for these types of loans on a small basis early in the business life, and keep your banker an important part of the advisory team.

For any company that accepts credit cards as a method of payment, a merchant cash advance is a business funding device that is often ignored. A business credit card advance enables a business owner to get a large amount of cash now, without incurring any added debt, by accepting cash now in anticipation of credit card receipts coming in. Companies who do this type of financing, similar to factoring of accounts receivable, take a share of the credit card receipts. Rates on this type of financing have recently declined so that this is a more affordable option for financing.

But working capital management involves more than just “where will the money come from”. It also involves the day to day paying of bills and spreading out the due dates of payments on borrowed money so that bills are paid on time without creating stressful days.

With a little experience and some spreadsheets, applying the detail to the numbers is the best method of managing working capital. Once the formulae are in the  spreadsheet, then diligent attention to variances along with a sense of what is happening in the business is very important. We can help with all of these, and also can provide outsourced CFO and other services to help you design the spreadsheets, work with the expenses, and project your cash flow needs. Identifying the problem areas early is very important.

Call us at VaughnCPA, LLC, 505-828-0900 or 970-667-2123.

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