Managing Working Capital
Companies with a fast inventory turnover, such as a fast-food operation, don’t have severe working-capital needs because the cash register chimes “ka-ching” all day, every day. This type of company might require 10% to 15% of its annual sales as working capital, accountants say.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.
The better an entrepreneur manages his or her working capital, the less he or she needs to borrow and depend upon lenders.
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