MENTORS Magazine

MENTORS MAGAZINE | EDITION 1 | 21

come together to form the basis of working

capital management?

It’s important that you have a fundamental

understanding of what makes up working

capital. Working capital management usually

has three key features. Each of these fea-

tures is equally important in determining the

financial health of your business.

1. Accounts Receivable
   First, look at your accounts receivable. This is
   the money due to your company. Any ser-
   vices or goods you’ve already provided for
   which you’re expecting payment can be con-
   sidered as accounts receivable. Your ac-
   counts receivable also include any overdue
   invoices you’ve sent to clients or customers
   that they’ve agreed to pay, but haven’t
   gotten around to yet.
   Most importantly, your accounts receivable
   represent your incoming cash flow. Goods or
   services for which you’ve already invoiced
   can be collateral you can borrow money
   against. Knowing that you have incoming
   cash flow on the books can be a big deal
   when it comes to getting your money.


2. Accounts Payable
   When you have determined your accounts
   receivable, you can check out your accounts
   payable. Your accounts payable are any bills
   (or other money) that your company has to

pay in the short term. A lot of companies

often try to delay accounts payable as long

as they can to maximize how much positive

cash flow they have available.

One way companies do this is by applying

“net” payment terms — such as net-30, net-

60, and so on. These net terms can be bene-

ficial for large businesses, but they’ve also

made a ripple effect through all kinds of in-

dustries where small and medium-sized

businesses (SMBs) are put in tough spots.

3. Assets and Inventory
   You also need to make sure you keep track
   of every asset belonging to your company.
   Any inventory of everything your company
   currently has on hand is thought of as a posi-
   tive asset. This is assuming that any invento-
   ry you have on hand is going to be sold and
   converted into capital.
   How a business manages its inventory can
   indicate the overall operational efficiency of
   your business. It’s important that you have
   enough inventory on hand to fulfill any po-
   tential orders, but not so much that you
   have an inordinate amount of working capi-
   tal tied up in your inventory.
   How your business handles these three com-
   ponents is the cornerstone of working capi-
   tal management. Now that you know what
   working capital management is, it’s crucial
   for you to understand why it’s so important.