Owners concerned about keeping their businesses solvent throughout the year typically create an ongoing strategy of sustaining working capital.
To learn exactly how they go about doing so, I asked two CEOs—Brandon Stapper of printing company Nonstop Signs in San Diego and Ismael Wrixen of online brokerage firm FE International in New York City—to weigh in.
Stapper and Wrixen explain working capital, how you can build reserves for low periods, the role your growth and inventory patterns play and how to benefit from the perspectives of others invested in your business.
We hold weekly meetings to review cash flow and go over revenues and expenditures for the week that include big payments, payroll and insurance.
-Brandon Stapper, CEO, Nonstop Signs
In order to maintain and grow a business over the medium-to-long term, it's important to have a firm grasp of your revenue and margins, and the delta between retained earnings and the capital requirements needed to meet your goals, according to both CEOs.
“This knowledge allows you to accurately forecast the financial demands of your current projections and to plan working capital requirements accordingly—be that through reinvested profits, working capital loans, other third-party financing, balance sheet liquidations or cost cutting," says Wrixen. "This approach means you can seize opportunities rather than merely react to balance sheet issues."
The amount of working capital available also determines whether you'll be able to survive a financial setback.
“I always keep an eye on how much cash and liquid assets we have on hand, and that has helped me through several tough situations, including losing a valuable piece of equipment because of employee negligence," says Stapper. "I replaced it quickly, but if I hadn't had that working capital on hand, it could have been the difference between the printer and the payroll."
Let's have a look at a few strategies for creating a cycle of working capital that feeds your business throughout the year.
1. Anticipate off seasons and build reserves.
Ensuring you always have enough working capital available requires knowing when your business peaks and drops off.
“Our sales typically fall off a bit in November and December, and our busiest months are in the summer," says Stapper. “Every year, I forecast generating more cash and short-term assets in the strong months to tide us over in the months when we're stretched a bit thin."
Seasonality issues are not unique to Stapper. In our digital world, buying behaviors are changing to further polarize shopping seasons. This trend affects working capital cycles, Wrixen points out.
“Whether a business has a seasonal peak in the summer or winter months, business owners need to prepare several quarters in advance and take a data-led approach to managing the business in and out of seasonal peaks," he advises. “Focusing on evergreen products helps longer-term throughput of inventory if overstocking does occur."
2. Choose strategies based on growth and inventory patterns.
The growth velocity of your business plays an important role in devising a working capital cycle.
“A business on a steady trajectory with ample history may be in a position to use retained earnings to fund future working capital," says Wrixen. “They can use longstanding business relationships to negotiate favorable payment terms and lower order minimums.
"But a business on a steeper growth trajectory may be younger in age and therefore find it harder to leverage organic methods of working capital funding," he continues. "Fortunately, working capital loans have become increasingly accessible, as have credit cards and collateralized bank debt facilities."
Stapper also points out that it's important to understand whether your inventory moves quickly or slowly. Why? Inventories that sell quickly tend to require less working capital because there's always cash coming in.
3. Take a team approach.
Creating an effective cycle of working capital isn't something an owner should attempt alone. Stapper regularly involves his management team.
“We hold weekly meetings to review cash flow and go over revenues and expenditures for the week that include big payments, payroll and insurance," he says.
Wrixen relies on trusted advisers.
“It's essential to have up-to-date and accurate numbers prepared monthly by a professional. And, at the outset, it's sensible to explore all working capital options with experts so that you know are prepared to take advantage of future options—because the application process, for lines of credit, as an example, takes time that you might not have during a working capital shortage."
Like other aspects of running a successful business, the cyclic nature of working capital requires careful planning and an ongoing attention to detail. Fortunately, investing time and resources in these three strategies ensures your business's safety and future.
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