CASH IS KING!
Net working capital is the lifeblood of your firm. When margins are high and the company is generating surplus cash, managers often fail to monitor net working capital. Your net working capital consists of:
- Current Assets: Cash, accounts receivable, inventory, and other liquid assets; and
- Current Liabilities: Accounts payable, payroll and tax liabilities, short term notes, and other short term liabilities
Current Assets less Current Liabilities = Net Working Capital
Failing to keep a close eye on working capital can be devastating. A quick downturn in the market, economic unrest, and fraud in your organization can all leave your company short of cash and without the ability to meet your short term obligations.
A good rule of thumb, and easy way to start managing your net working capital, is to have 30-day receivables for customers and 45-day payables to vendors. Measure your net working capital from month to month and track the trend to avoid surprises and cash shortages.