Working Capital

By Christina Suter on Aug 15, 2015 at 08:16 AM in Business Issues
Working Capital

I advise all my small business owners to know their working capital numbers and to save at least a half of a month's worth of their expenses.I have them take all the expenses due in the first 10 days of the month and keep that amount in their account at all times. For those who have never had that cushion, they quickly realize how freeing and how great it feels to know that two weeks of low business, or mandatory closing wouldn’t sink their business. They have a sense of peace knowing that they’d be ok.

When people run into a negative situation in their business or personal accounts, their feelings of success are altered. People who don’t feel successful think often about closing their business. Not having enough working capital on reserve not only drains their bank accounts, it drains their resolve and their desire to continue  working this business that they used to love. The effect of having poor cash control is invisible to most business owners. If your business is neutral, that means it’s covering itself and you, but you can feel as if you’re failing or always behind. You become more effective with a half a month cushion of capital in your account.

Protecting Your Working Capital

Be mindful of the trap, however. For some people, once the relief comes in, people tend to want to spend it, they fail to protect that capital that they worked so hard to save. They treat or reward themselves with things like extra dinners, new equipment. Soon, I can't afford it is replaced with it's opposite, the enemy of savings; I can afford it. Before you know it, their needs change; they need a new computer, they need new supplies. Their perception of needs changes. 

Some people are good at protecting their working capital because they have made the adjustments in their habits, and they are used to doing it. They have put the things I’ve mentioned into practice. It isn’t natural (at first) but it’s worth it; so I encourage you to start today. The anxiety of not having enough can shift from causing you to think that you’re bad at running your business to realizing you’re capable, confident, and that you can make the changes.

Three months of core expenses would be even better to have saved in a savings account. And then, your responsibility is to do things that don’t mess up your cash flow. Your actions will support you in meeting your goals.