Monthly Archives: January 2013

Working Capital: The Good, The Bad, and The Ugly

Working capital is the excess of current assets over current liabilities and is a financial measure of liquidity or ability of a business to meet its obligations.  Current assets include cash, accounts receivable, inventory and other assets that are expected to be converted to cash within 12 months. Current liabilities include accounts payable and accrued expenses for salaries, taxes, interest as well as loan payments and other liabilities due within 12 months.The GOOD news is that effective management of working capital can strengthen a company by providing funds needed to support operations as well as reduce financing costs and dependence on external sources of financing.The BAD news is that poor management of working capital can weaken a company by draining cash resources required to meet payment obligations, resulting in the need to rely on costly outside debt or equity financing.The even more UGLY news is that a company that has mismanaged working capital to the extent that it cannot meet its current obligations, and is not able to secure additional financing, may ultimately face an unfriendly acquisition, bankruptcy or liquidation. 

The following are some financial metrics that should be tracked and reviewed monthly to alert management of negative trends developing in working capital so that appropriate corrective actions can be taken:

  • Current Ratio = Current Assets / Current Liabilities
  • Quick Ratio = (Current Assets – Inventory) / Current Liabilities)
  • Receivables (Days) = Accounts Receivable / Average Daily Sales
  • Inventory (Days) =Inventory / Average Daily Cost of Sales
  • Payables (Days) = Accounts Payable / Average Daily Purchases

Optimal levels of working capital and associated metrics may vary considerably according to the particular industry. 



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Combating Construction Fraud

Jim Anderson is a Partner with B2B CFO®, with over 30 years industry experience in construction.  As a partner with B2B CFO®,, a national firm of 150 partners, he provides outsourced Chief Financial Officer services to small and mid-sized companies.

 

Construction projects are minefields of potential financial risks for the unprepared contractor. …

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