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What is working capital?

If you are a small business owner, pay close attention to this message.

Working capital is one of the most misunderstood concepts in the SME world.

Why is that?

Many owners consider cash and current assets of their company as ‘their money’.

In most cases, they are the only ones managing the business finances, and they have been the ones making the original investments.

They feel the business bank account is just an 'extension' of their own wallet.

That is wrong.

A small business is a living and breathing organism.

As such, it requires fuel to work properly.

Working capital is the fuel enabling the business to sustain its short-term obligations.

It cannot be misused or stripped out of the business.

Owners who mismanage their business finances, find themselves in difficult situations due to lack of working capital.

Oftentimes, it is evident that they want to strip the business of all the cash it has so they can enjoy it for their personal use.

Here's an example:

When we negotiate with small owners who want to sell their business, one of the first things we need to address is the working capital need of the company.

A business sale is a delicate process and requires us to be very mindful about meeting the company obligations immediately post-acquisition.

That is not possible without having working capital in the company.

The funny thing is:

Owners almost always want to sweep the cash and leave a business with an empty bank account.

That is a recipe for disaster and a one-way ticket for failure.

No buyer will ever acquire a business that cannot meet its short-term obligations with some working capital.

If you are a small business owner looking to sell a company, be sure your business will have some working capital in the bank post-acquisition.

This simple strategy will increase your chances of closing the deal.


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