Working capital is a vital concept for business owners to understand. Our friends at Inform Consulting Group recently stated the reasons for this in very clear terms:
“Working Capital is a notion that business owners and managers need to come to grips with and manage effectively in order to ensure sustainability.
Maintaining healthy working capital provides a safety net to absorb possible bad debts, for example, and may be critical if you need to apply for a business loan. It is also critical for maintaining operations if you receive an unusually large order from a client.”
To see their full article click here.
In order to understand their working capital position – which is “the sum of Cash at Bank + Accounts Receivables + Inventories + Other Current Assets minus the sum of Accounts Payables + GST & Tax Liabilities + Other Current Liabilities. Working capital in effect represents the amount of cash and assets easily transformable into cash, and which is available to the business for payment of all short term debts. It also represents the amount of money available to the business for growth and expansion.” – business owners must know what the numbers are. ie the balances each of these applicable assets and liabilities accounts.
To know what these balances are requires up to date numbers. In other words an accounting system that provides the business owner with relevant, reliable and current data. Traditionally small business would get an update of their financial position from their accountant once a year – often up to nine months after the date at which the financial position they described. The introduction of GST has meant, for some businesses those numbers can be produced quarterly, however few look at it.
With the introduction of Cloud Based Accounting Systems it is now possible for small business owners to have access to the current, relevant and reliable numbers of their business and these systems allow accountants to provide their clients with real value for little extra cost in the form of a virtual Chief Financial Officer (“CFO”). This provides the small business owner with an outside view of their business performance in the same way as big business does thus providing them with a competitive advantage over those who only look at their numbers on quarterly or annual basis.