Brother let me tell you I just had a better understanding of working capital thanks to this post, what still confuses me is why a negative working capital is positive for the business.
And speaking of business , how could I apply and analyze working capital to a small local business ?
The Following is an actual example:
I have a small local coffee shop in Playa del Carmen (greetings from Mexico ) , so I have no accounts receivable , I owe my coffee and dairy supplier and I have inventory as well but I have no accounts receivable.
That said , how should I analyze and measure working capital ?
Hola Pedro, thanks for your message, glad I was able to share a valuable insight!
1. Why negative WC can be good
Negative WC can be good because it means that the operations of the biz can fund the growth.
Classic example: Insurance companies collect premiums and pay out only when a specific event happens.
With the premiums the collect, they can invest/grow the biz.
The idea is that you’re not using outside capital - its generated with the way the biz operates.
2. How you can analyze and measure your WC
Inventory and how long it takes you to pay your supplier are the two main factors imo.
In terms of inventory, you should try to maximize the time at which you can turnover your inventory. When it comes to how long to pay your suppliers - make them wait as long as possible (maximizes your cash, but dont burn bridges).
Another interesting idea is to try to implement a gift card model like Starbucks did.
They’re able to collect billions upfront through giftcards
Example; sell a card with 10 coffees with a discount. You’ll collect the cash upfront, and maybe some people won’t even use up all their coffees.
Thinking as I write, but you get the idea : collect cash upfront
Happy to answer any other questions and definitely interested in connecting as I’d love to go at your coffee shop once I’m in Mexico once day!
Brother let me tell you I just had a better understanding of working capital thanks to this post, what still confuses me is why a negative working capital is positive for the business.
And speaking of business , how could I apply and analyze working capital to a small local business ?
The Following is an actual example:
I have a small local coffee shop in Playa del Carmen (greetings from Mexico ) , so I have no accounts receivable , I owe my coffee and dairy supplier and I have inventory as well but I have no accounts receivable.
That said , how should I analyze and measure working capital ?
Muchas gracias AI !
Hola Pedro, thanks for your message, glad I was able to share a valuable insight!
1. Why negative WC can be good
Negative WC can be good because it means that the operations of the biz can fund the growth.
Classic example: Insurance companies collect premiums and pay out only when a specific event happens.
With the premiums the collect, they can invest/grow the biz.
The idea is that you’re not using outside capital - its generated with the way the biz operates.
2. How you can analyze and measure your WC
Inventory and how long it takes you to pay your supplier are the two main factors imo.
In terms of inventory, you should try to maximize the time at which you can turnover your inventory. When it comes to how long to pay your suppliers - make them wait as long as possible (maximizes your cash, but dont burn bridges).
Another interesting idea is to try to implement a gift card model like Starbucks did.
They’re able to collect billions upfront through giftcards
Example; sell a card with 10 coffees with a discount. You’ll collect the cash upfront, and maybe some people won’t even use up all their coffees.
Thinking as I write, but you get the idea : collect cash upfront
Happy to answer any other questions and definitely interested in connecting as I’d love to go at your coffee shop once I’m in Mexico once day!