How to

A first-timer’s guide to working capital

Cash in and cash out — you likely know this principle of staying on top of your business capital. But there are a few other important things to know about putting your capital to work. 

Manage your cash flow

Having a positive cash flow simply means your business has more money coming in than going out. A positive cash flow is critical to the operation and success of your business, and it’s a key indicator of a healthy, well-run business. Unfortunately, especially in the beginning, maintaining a positive cash flow can be difficult.

There are two basic keys to maintaining a positive cash flow. First, you need to know how much cash is coming in and when, and second, you need to know how much cash is going out and when. The trick lies in balancing your income against your outlay.

To do this, you need to be aware of a number of important factors. Is your business seasonal? Is your payment cycle in sync with your collection cycle? Are you managing your assets and inventory properly by purchasing only what you need, when you need it? In order to keep your finances running smoothly, you'll need to constantly evaluate all of these things and be prepared to change your practices as necessary.

Get paid

Unless your customers pay immediately when they receive goods or service, which is the case if you run a café for example, then you may be in a position where you are extending credit. In this case, you'll need an effective system for monitoring and collecting receivables and a clearly defined collection policy. All of your customers must be aware of your collection policy, and you must be willing to enforce it in the event that a receivable becomes overdue.

Think about financing

There are also financing options available that can help you maintain a positive cash flow. Operating loans can help you cover your regular costs ahead of collecting the receivables you would need to pay them. The lender will use a percentage of your accounts receivable as collateral against an operating loan. Operating loans aren’t one-time loans – they’re set up with a lender as a series of pre-approved, short-term loans with a maximum limit, saving you the hassle of having to constantly negotiate new terms. Many new businesses require operating loans, but as your business grows, you'll ideally be able to operate without them.