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Assessing your working capital requirements - 5 points to get it right

Cash, or lack thereof kills most small businesses within the first few years of starting up.

Inevitably a good awareness of what you need to survive and thereafter to succeed would make a world of difference.

Here are 5 tips that could make planning for working capital easier,

  1. Understanding inflows - This is not your invoice “due-date”. This is the number of days most of your customers take to pay you.

  2. Outflow patterns - Similar to the above, know your own payment cycles. How often and how much do you need to pay? If you use contractors, this is especially important as they sometimes tend to to bundle up invoices for months together before sending them out. If on regular payroll, you will need to make a payment at least every 30 days

  3. Understand and use basic forecasting. Combining the information with 1&2 above, you should be able to create a basic cash forecast. In MS-Excel you can search and utilise the form named "Small Business cash flow projection". Uploaded here for convenience.*

  4. Review the forecast every month diligently and map out exceptions. You should be able to ascertain when and what caused disruptions to planned receivables/payments.This is the main reason why SMEs fail on cash planning. Once you have a forecast, it is important to review why planned numbers are not reached.

  5. Understanding basic ratios - Though this might sound very technical, understanding some ratios in relation to your Company can help keep tabs on critical numbers. Xero's business performance dashboard allows you to track business ratios such as debt to equity, net asset position, profit margins etc. based on the numbers recorded on the platform. Once you position this on your main screen, you can constantly know what numbers are where and which areas need your attention.

Once you get started, the process becomes easier and more habitual.

If you need initial help, Evalua8's team is right here to hand-hold you. Feel free to contact us to talk more about your requirements today.

*The format belongs to the MS-Office Suite and has been uploaded here only for convenience. The format is not owned by Evalua8.

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