Why Working Capital? Working capital, references any expenses necessary to fulfill the delivery of a final product or service to a client. These can be Cost of Goods Sold, Inventory, Payroll, Job Supplies or any other line item necessary to complete your obligation.
Since many organizations provide services in advance of payment, collecting money after the fact, timing of collections is a common cash flow challenge. This is where the line of credit comes to the rescue. Fronting cash to keep the business operating as it continues to provide products or services to other clients, until money is collected.
1. Own Your Collection Cycle How long does it take to collect money from a client after completing your obligation? 15 days? 30 days? 90 days? The lengthier your cycle, the larger of a line of credit you may need. Many times, we would recommend finding ways to shorten the cycle by setting firm expectations from the start of an engagement, but in some industries there will always be a gap in the sales cycle. Examples:
- Companies who sell a product must first purchase inventory to offer.
- When invoicing for a service, labor costs may become due before paid in full by a client.
- Fronting for job supplies or other direct costs may be necessary to complete a job.
2. Your Balance Should Not Exceed Accounts Receivable To reiterate, a line of credit is meant to front costs that are necessary to complete the company’s obligation to a client. If those costs exceed what you earn from selling a product or service, you must first address that underlying problem. To ensure this, your line of credit balance should never exceed what your client owe you (Also known as your Accounts Receivable). As you collect from your clients, you should use a portion of the funds to pay back the balance on your line.
3. Always have Access to a Line It is ALWAYS significantly easier to get a line of credit when you do not need it vs. when you do. The goal is to act proactively and assume one day access to capital could become important, if not necessary. Don’t be afraid of having “access” to debt! To be clear, we are not encouraging the use of the line of credit, just having access to one. If the organization has enough cash to front the payments, then it is encouraged to avoid the use of one (no daily interest incurred!).
TAKE ACTION TODAY!
Ask yourself, how big of a line of credit should I have access to? Now call your banker and get it! Still unsure what to do next?
Call Accounted4 at 215-801-3365 or send us a message! We are happy to provide a complimentary consultation to help you outline your first steps to better manage your cash flow.
Take the Accounted4 Challenge! Our QuickBooks Online analysis is meant to find money being left on the table. How much can we find?!
