What is the right amount of working capital to have in your company? Why it is important to plan and protect your working capital?

As the old saying goes “Cash is King”. What are you doing during these times to protect your cash reserves?  Increasing revenue or decreasing costs makes a difference, but what else can be done?

One financial decision that many entrepreneurs seem to struggle with is how much cash their business should keep in reserves.

A generally accepted rule is that we should have enough cash on hand to cover six months of expenses in case of emergency. However, in reality there is no one-size-fits-all approach that applies to everyone's business. The answer requires an assessment of where your business is in its lifecycle.

While there is no magic number, you should have enough cash to cover at least a few months, and if your business is seasonal or depends on big orders that can be few and far between, you’re definitely going to want a larger reserve. 

Here are some ways you can protect your reserves:

  • Insist on 50% deposit up front and 50% upon completion of job.
  • Focus on high margin, in-house jobs.
  • Take advantage of vendor terms.
  • Order inventory on demand.
  • Collect Account Receivables.
  • Cut non-essential spending.
  • Don't be too quick to re-hire. Be lean and mean if you can.
  • Increase advertising with proven ROI.
  • Defer payments.
  • Take a working capital loan with favourable terms when money is still available and cheap.

These little things can make a big difference when you focus on them.  Cash  truly is King, especially in trying times – protect yours!

Adapted from Working Capital by Mike Baxter, Director of Operations