How Growing Businesses Should Manage Working Capital



First of all, why should you be concerned with working capital? There are a few main reasons why this is important. For starters, if you pay attention to your working capital, you can be assured you have enough financial cushion for unforeseen circumstances such as a slow month, failing equipment, or personal crisis. This cash cushion is known as “working capital,” or the money you use in your day-to-day operations. Naturally, the less you have on hand, the more you risk cutting your expenditures too close to the core.

Three-Month Test
One of the best ways to accurately chart out how much of your income you use for operating expenses is to do a three-month test. The key here is to have a separate account or business credit card for your business operations so that you can track how much you’re spending each month and get an accurate picture. This way, all of your spending is in one place and you can see just how much working capital you need each month.

Estimate Quarterly Taxes
Since the IRS requires businesses to pay quarterly estimated taxes, don’t forget to account for this when planning out your working capital. The simplest way to figure what you owe is to follow the estimates the IRS provides on the coupons they send in the mail.

This link has further information on your quarterly estimated taxes

You know the old saying, you have to spend money to make money? This saying directly applies to reinvesting in your company. You shouldn’t feel quilty about redirecting money back into your company because this is the only way your company can grow and expand. The important thing to keep in mind when reinvesting in your company is to make sure you’ve budgeted some money for these expenditures when you planned out your working capital budget. Reinvesting in your business can include, investing in marketing, saving up for new equipment, or hosting an open house to show off your products to the public. An average goal is to invest 30% of your income when you’re in growth mode back into your company to foster this growth.

How you spend your income is important. If you’re short on cash one month, deciding which things you might have to reduce payment on or cut out for the time being is important. Follow this list below to determine which things are most important to pay fully and timely, and which things you can slack on a little for the time being if you absolutely have to:

  1. Operating expenses: salaries, rent, supplies, overhead.
  2. Reinvesting: upgrading your equipment, advertising, creating business cards and flyers.
  3. Deductibles: health insurance, transportation or pre-tax retirement savings.
  4. Quarterly estimated taxes
  5. Retirement
  6. Yourself

The goal of a business isn’t just to make money—it’s to earn enough and budget wisely so you can grow and expand. Keeping an eye on your working capital is a crucial key when planning for the future because it gives you the cash cushion you need for those day-to-day operation expenses. Harbour Capital’s working capital program can be a business-saving program for companies that are struggling with their working capital and need a cash injection to get them where they need to be financially. Call us or apply online today to learn more.