Run Your Household like a Business
One of the most important areas of concern a small business owner may have when managing working
capital is the long term effectiveness of current asset management. When working capital is managed
properly operational efficiency is promoted giving a company high liquidity. Current assets such as
inventory and credit sales must be increased and converted to cash at the highest rate of efficiency.
Though tempting, paying cash for fixed assets is ideal, timing can be an issue. When money is tight using
cash for all payments will decrease working capital so financing purchases and keeping cash would be
desirable. This excess liquidity should be looked at as an opportunity to invest in items that will increase
future productivity; instead of just a cushion for short term liabilities. With correct management of
current assets within a company’s working capital should incur the highest degree of efficiency and
effectiveness towards profitability and stability.
Managing working capital consists of the current assets and the current liabilities of a business which
consist of those items that our business normally converts into cash within one year. Current liabilities
are those debts of a company that are normally expected to be paid within one year. These are typically
accounts payable, fixed payments, and accrued liabilities.
Managing working capital consists of net working capital; the difference between a business’s total
current assets and its total current liabilities. If assets are what a business has a right to own and liabilities
are what a company owes, then what is left is net working capital. The formula for working capital is:
Net working capital = Gross working capital (current assets) - Current liabilities
TIME VALUE OF MONEY
Business owners and households must take the concept of time value of money in order to effectively and
efficiently manage their money and capital budgeting. How money is spent today can mean the difference
between financial suc