The key to success in business finance is having sufficient working capital and not having enough is a mistake I see time and time again in business. Normally, there are only three sources of working capital available for owner-managed businesses:
- Owner's Funds. This could be funds initially invested into the business on set-up, or monies subsequently loaned to the business, maybe from undrawn remuneration.
- External Borrowing. This could be from banks, relatives, or finance companies.
- Retained Profits. These are undrawn profits from prior years, the cheapest and best source of working capital.
Here are some pointers:
- Never underestimate the working capital required in a business.
- Always use cash flow forecasts to forewarn of periods of peak demand.
- Make sure you have adequate reserves of working capital, whether cash in the bank or an under-utilised borrowing facility.
- Keep on top of the management of your business at all times. If, for example, you don't collect your debts it will soon run away from you.
- Make sure you use decent accounting software so you can keep track of your working capital.
- Restrict your drawings to a level which allows the accumulation of retained profits.
Your working capital is your lifeblood in business so treat it like a lover, tenderly and with huge respect!
If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at email@example.com. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.
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