Monday, December 12, 2005

Working Capital Requirements

Tips on ManagingCash Flow Wisely


Question: Is there a formula to determine the necessary working capital for a business?
-- Thom, Falmouth, Mass.

For businesses that sell big-ticket items or services, an entrepreneur requires a heftier working-capital cushion because the next sale might be weeks or months away. A manufacturer, for instance, incurs high costs upfront for materials and labor, but has to have the means to keep the lights on until its customers make a payment. It might be reasonable for a company such as this to keep at least 25% of annual sales as working capital.

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