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Working capital cycle

Working Capital Cycle

Cash Flow is something everyone talks about, but few people really understand, especially when you get into the details of what drives cash flow. In this episode Mike and I are going to dig into the Working Capital Cycle, but first we wanted to mention some important resources.

The SBDC – Small Business Development Center will help new businesses get the resources you need to get your business up and running. They can even help you get a loan.

Have you tried the mobile app? It’s actually awesome!

You can quickly see high level important things, like the top five customers who haven’t paid you.

You can also see days cash on hand in the app, and that brings us to the main topic for today.

Now let’s look at The Working Capital Cycle.

The questions are:

  • How much do I have?
  • How much do I need?

Let’s focus on the how much do I have part.

It is NOT simply how much you have in the bank

The calculation is:

Current Assets – Current Liabilities = Working Capital.

In short we’re looking at whether or not you have enough to cover your immediate obligations. You need to know this before we can determine how much cash you need.

So for now we’re going to stick with understanding how much cash you have!

Now if you have $100,000 in current assets, and $35,000 in current liabilities.

That means your working capital is $65,000, and the ratio is 2.86.

This means that you have enough working capital to pay off your short term obligations twice and you would still have some money left over.

The way Mike explains it, this means that for every dollar you owe on credit cards, you have $2.86 to pay for it.

If your working capital ratio is .75, that means you don’t have enough to pay off your short term obligations.

This is not always bad! In high growth companies it’s ok to have a negative cash position. The idea is that they are building towards something and then at a certain point, things take off and they overtake this position.

You can have a neutral cash position. This got the auto industry in trouble because they were trying to match money in with money out. It didn’t work and then they needed bailouts.

When you are looking at ratios, you need comparative data. A ratio like this on it’s own doesn’t really tell you much.


How do you compare to the industry?

How to you compare to YOU today vs yesterday?


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