"Working Capital: An Unknown Key to Success" with Eva Hukshorn

"Working Capital: An Unknown Key to Success" with Eva Hukshorn

05-Dec-2012 by Startupbootcamp

On Thursday, May 24 Eva Hukshorn – Partner at EFactor, the largest online network for enterprenours – gave a presentation at out Amsterdam office on the subject of working capital. During the 3-hour workshop our teams covered a lot of ground with Eva, both theoretically as well as in practice.

Eva started off by pointing out that working capital management is one of the most underestimated financial tools available to entrepreneurs. The reason for this is not its complexity or the amount of time it requires. “It’s just due to a lack of knowledge or a lack of focus” – she explained. The main role of working capital is providing the means to match short term liabilities with short term income: it represents the funds that our startups require to keep their business operational on a day-to-day basis.

What precisely working capital is

Working capital is a measurement of liquidity, it states how much capital covers the current assets. Eva also clarified other related definitions, e.g. “net working capital” (measures of shortage or surplus between the amount of capital available and the current assets), “current liabilities” (all liabilities which support the current – core – operations of the business), and “current assets” (part of assets that have the form of cash or that convert into cash within one year). Working capital’s characteristics and implications, as well as basic types of calculations were discussed and it was concluded that working capital is an indication of the operational efficiency of the company.

Working capital: economic cycle

A business’ cycle starts with growth (characterized by unpredictable plus and needing cash to support growth), then it stabilizes (returns are steady, working capital levels are predictable) and in the end comes a decline (unpredictable minus, cash is needed to slow down decline or support turn-around). The discussion was supported by numerous practical examples.

Conclusions

The main conclusion of the workshop was that a company should always produce a cash flow statement – especially when a startup. Other conclusions relate to underestimating working capital which might lead to stunted growth, implementation difficulties, cash crisis, optimization of fixed assets, commitment failures, discontinuity of operations, and lack of inventory. On the other hand, overestimating working capital can have consequences in too liberal credit terms, too much inventory, too relaxed management, and reduction of Return on Investment.

If you’d like to become a member of EFactor, visit www.efactor.com