Working capital is the cash you need for day-to-day operations. Three things drain it fast: letting customers pay you slower than you pay vendors, holding too much inventory, and poor negotiation of payment terms. One client sat on a year's worth of stock in a warehouse, freezing capital that could run the business.
Chapters
Today we're going to talk a little bit about working capital and 3 of the things that affect it that are sort of, um, kind of under the radar for a lot of people, right? And those 3 things are your AR terms, your AP terms, and inventory, right? Now, how do those things affect it? Well, first of all, what's working capital? Working capital is the capital you have available to run day to day, pay short-term debt, things like that. Now, when you have AR terms that are longer than the terms you have with your vendors, like suppose you, your terms for your clients are they can pay you in 30 days, but your terms with your vendors are that you have to pay them in 10 days. That's a 20-day period of time that you're basically floating the jobs for your clients, right? You, those things need to be addressed and kind of worked and coordinated together. And a lot of times it takes just simply talking with your vendors to say, hey, Can we have different terms? That kind of thing. Inventory, how does that affect it? Well, we've seen with new clients, we one time we had a client that that came to us and they had a year's worth of inventory sitting in the warehouse. Now, what does that mean? That means that they took capital and purchased a year's worth of inventory, right? When they could have bought a month, two months, three months of inventory, and then had all that additional cash to run day to day. Okay, and when so so those are the kind of things that you kind of have to work in. They they need to work in coordination to make sure that the structures that you have with regards to inventory, with regards to AR, with regards to AP, that they're working in a way that doesn't put you in a cash crunch when you least need one. Hope that helps. Talk soon.
