Over the years many companies have come to me requesting funding to cover financial shortfalls because they did not properly plan for their working capital needs. The amount of working capital you need changes as your business grows and is often seasonal if your business is seasonal. As your business grows your working capital needs grow also!
A business that does not have a working capital plan can literally sell themselves into bankruptcy. As sales increase the cost of working capital increases and because they have not properly planned for this the business has to take high interest loans and cash advances which ultimately kill the cash flow and therefore the working capital is not there.
Working capital is part of what it takes to operate the company and therefore is not considered as income or cash; this especially important when selling your business or seeking investment capital or business loans. The buyer, investor or lender will have to paid out of the cash! Many entrepreneurs who have pitched me on investing in their business have made the mistake of not separating the working capital and therefore promise returns based on the income minus the expenses while not figuring in the working capital float. The working capital float is the what a business uses to cover expenses while they wait to get paid.
You may not think you have a working capital float but every business does. Some example of things that the working capital float covers are: office rent, inventory, advertising, payroll, utilities.