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Calculating Working Capital

Oscar Rombola 15-Jan-2015 0 Comments Permalink

Calculating your Working Capital is essential to the financial success of your company. If you are running a business, you must have Working Capital. Working Capital is the measure of cash or liquid assets needed for day to day operation. By calculating your Working Capital, you are able to determine your company’s ability to meet financial obligations.

calculating working capital

The above is especially true in the transportation industry. Whether you are a 3 truck company and invoice your customers $60,000 a month, or if you are a 25 truck company and invoice $500,000 a month, the principle remains the same. As long as you have enough cash coming in the next 30 days to pay for all the expenses you have sufficient working capital.

Too often companies confuse operating profit with working capital.

Company owners look at the statement of profit and loss (Income Statement) and see that they had more revenues that expenses. Excellent! The company is making money. All too often I hear “we are making money but where is it”. Frequently, the profit of the company is used to pay down debt (pay for equipment) or it is tied up in accounts receivable and these have not, yet, been collected. The profit is not necessarily realized in cash in the bank account.

Calculating working capital requires the use of another financial statement; the balance sheet.

A balance sheet will tell you whether you have enough assets converting to cash (over the short term) compared to the financial obligations that you have to pay. The benefit of calculating working capital is that it will allow you to determine if you will have a “Cash Crisis” even though you are running a profitable trucking company.

This calculation of current assets (assets that will convert to cash within 12 months) vs current liabilities (things that you will have to pay within 12 months) is termed “the Working Capital Ratio”. Successful companies should maintain a ratio ranging between 1.2 and 2.0. If your working capital ratio is 1.2 this would mean that you will have $1.20 of cash to pay for every $1.00 you have to pay out.

Determining your company’s Working Capital is absolutely essential in determining the overall health of your business. It is a simple calculation:

Current Assets – Current Liabilities = Working Capital
Example: $50,000 (Current Assets) - $24,000 (Current Liabilities) = $26,000 (Working Capital)

Determining current ratio:

Current Assets / Current Liabilities = Working Capital Ratio
Example: $50,000 (Current Assets) / $24,000 (Current Liabilities) = 2.08 (Working Capital Ratio)

In the above example, this trucking company has a positive working capital of $26,000.00 to sustain operations and continue to operate the business. Its working capital ratio of 2.08 indicates that this is a healthy business with sufficient liquidity to meet ongoing financial obligations.

A key component of the above two formulas is “Current Assets”.

These assets include; accounts receivable, prepaid expenses, inventory, securities and other such items. For trucking companies, among the most valuable of these assets are the Accounts Receivable Invoices. All trucking companies have to offer their customers a credit period that may vary from 30 to 60 days. In some cases, this period gets extended to 90 days or more. Meanwhile, your trucking company needs to pay its ongoing costs of fuel, payroll, overhead, taxes and more just to keep trucks rolling and pulling freight. For this, ongoing liquidity is a major factor. Factoring your invoices for immediate cash solves this problem.

Factoring services provide cash to trucking companies when they most need it … every day.

Most trucking companies have cash flow challenges finding themselves in a tight spot if customers delay payments. These common problems include; poor credit quality resulting in high levels of bad debt, and insufficient funds to sustain ongoing operations. It is estimated that 15-20% of all trucking companies utilize the services of a factoring company to improve accounts receivable management and cash flow. The most successful of these businesses choose a factoring company that understands the transportation industry and provides real value to support your company’s bottom line.

A freight factoring company, such as Accutrac Capital, specializes in offering tailored services to meet the rigorous demands of the transportation industry.

Not all factoring companies are the same!

When searching to find the right invoice factoring company for your trucking business, look for a reputable Factor that understands your business. Not all factoring companies provide the same range of services. The best choice is to select a factoring company that not only provides simple, convenient and immediate access to your money, but also additional services designed to save you money.

Accutrac Capital delivers unique financing solutions for your trucking company: load advances, fuel discounts, equipment financing, discounted currency exchange and much more.

For more information about factoring, contact us today.

Written by Oscar Rombola

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