Does running out of cash keep you up at night? If so, you are not alone. Many business owners and leaders report worrying about the amount of cash available in their businesses.
However, there is a way to measure how much money you need to operate your business without running out of money. It’s called the Working Capital Requirement (WCR). By calculating the WCR, you will know how much cash you need to have readily accessible to sufficiently operate your business
The calculation is as follows:
Working Capital Requirement $= Cash Conversion Cycle (Days Receivable + Days Inventory – Days Payable) X Average Daily Sales (12 months sales / 365 days)
This means that you need to keep access to cash in the bank, line of credit, credit cards and other financing sources equal to this number.
For example, if Days Receivable is 30 days, Days Inventory is 45 days, Days Payable is 35 days, and annual sales are $1 million, then your working capital requirement would be: (30+45-35) X $2,739 ($1,000,000/365) = $109,600. Having this much access to ready cash will ensure you maintain day-to-day operations without running out of cash.
What is your working capital requirement? Use our Tool Kit to help you calculate
Need more guidance on how the WCR and other key metrics affect your business’s financial health? Schedule a free consultation with our Numbers Coach to discuss metrics that make sense for your business.