MENTORS Magazine

22 | MENTORS MAGAZINE | EDITION 1

Working capital management is vital to the

success of your business and how your busi-

ness is viewed by others.

The ability to properly manage working capi-

tal also relates to the growth of your busi-

ness. This is in addition to

its overall operational viabil-

ity. Managing your working

capital is about more than

keeping cash on hand and

having a financially solvent

company. It’s about how

you’re using that money

and if you have the business

acumen necessary to capitalize on your as-

sets.

Reliable working capital management means

ensuring that your business maintains a pos-

itive cash flow. This cash needs to satisfy any

short-term operating on top of any other

bills.

The amount of working capital you have

compared to your existing obligations de-

fines your working capital ratio. The formula

for your working capital ratio is that you take

existing assets and divide them by your lia-

bilities.

This ratio is key to determining the financial

health of your company. A ratio of less than

1.0 may indicate that your company cannot

to meet its short term debts and might be

dealing with liquidity issues. This is also a

sign of a business experiencing cash flow

gaps.

If your working capital ratio is too high, it

could mean you don’t know how to take ad-

vantage of an opportunity. If

your working capital ratio is

higher than 2.0, it may re-

flect that you don’t know

how to make the best use of

your assets to invest back

into the business and con-

tinue to grow your company

while increasing revenue.

The “goldilocks” zone of where you want

your working capital ratio to lie tends to fall

in between 1.5 and 2.0. This tells people that

your business is financially solvent with plen-

ty of cash on hand, but is still taking proac-

tive steps as it pursues future growth.

We’ve shown how you can define working

capital management. You also need to un-

derstand why properly managing your work-

ing capital is important. What can SMBs do

to create more working capital in a world

where it seems like everyone is trying to de-

lay payments for as they can?

We already discussed it, but existing invoices