Net working capital is calculated as current assets minus current liabilities.  If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

 

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash.  Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.  The management of working capital involves managing stock, accounts receivable and payable, and cash.

 

• Cash management.  Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
• Inventory management.  Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. 
• Debtors management.  Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa).
• Short term financing.  Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilise a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

At Charlton Baker we are very experienced in helping our clients to manage cashflow and working capital.  If you are encountering issues, either because times are difficult or because you are growing too rapidly please do not hesitate to contact us so that we can discuss som eof the options available to you.