by Mark E. Battersby / Published September 2023
Working capital is all about maintaining the level of cash needed for day-to-day operations as well as managing the funds for investment in the pressure cleaning business for tomorrow. Unfortunately, today’s tighter credit conditions along with inflation make managing working capital difficult but still essential.
Working capital is important because it is necessary to keep the operation solvent. By definition, working capital is simply the amount by which the pressure washing operation’s current assets exceed its current liabilities.
Too little working capital means the pressure washing business will soon be unable to pay its bills. Too much working capital means that the operation is passing up the opportunity to put excess working capital to work elsewhere in the business or even to invest those unneeded, excess funds somewhere to produce extra income.
Any pressure washing contractor, equipment dealer, or supplier who performs the calculation of current assets minus current liabilities will arrive at the amount of working capital in their operation. Put another way, an operation’s working capital is made up of its current assets minus its current liabilities.
Comparing the amount of working capital today with the amount at an earlier date will indicate the amount and direction of change, which can be significant. However, not much will be accomplished insofar as determining the pressure cleaning operation’s future working capital needs or, more importantly, how to meet them.
Working capital management is a strategy to ensure that a pressure washing business operates efficiently by monitoring and using its current assets and liabilities to optimize cash flow. This is achieved by the effective management of the operation’s accounts payable, accounts receivable, inventory, and cash.
A business should have enough cash available to cover both planned and expected costs, while also making the best use of the funds available to fuel growth. While managing it effectively is something of a balancing act, working capital is essential to the health of every business.
Improving the way working capital is managed can free up cash that would otherwise be trapped on the operation’s balance sheet, reducing the need for borrowing and fueling growth.
There are a number of strategies for effective working capital management, including the following:
Some pressure cleaning businesses have enough cash reserves to fund their seasonal working capital needs, but that is rare. Fortunately, working capital can be created from a variety of sources. Most operations’ working capital comes from the earnings of the business. Other sources frequently include the sale of equipment or other unneeded assets, borrowed funds, and, in some cases, the issuance of stock.
If a pressure washing operation, like the majority of businesses, experiences a need for short-term working capital, planning ahead becomes more important than ever. To get caught off guard with an expected surplus of working capital may mean missing out on one big order, one big sale, or one great opportunity. Again, it is important to plan ahead and consider the following funding options:
Many lenders work with the U.S. Small Business Agency (SBA) to provide government-guaranteed or -backed financial assistance. One such program, CAPLines, is an umbrella program to help small businesses with their short-term and cyclical working capital needs. Included under this umbrella are four lines:
With the exception of the Builders CAPLine, which cannot exceed five years, the maximum maturity on a CAPLine loan is 10 years. Holders of at least 20 percent ownership in the business are required to guarantee the loans.
With strong working capital management, a pressure cleaning business should be able to ensure it has enough capital on hand to operate and grow. However, there are downsides to the approach. After all, working capital management only focuses on short-term assets and liabilities. It does not address the long-term financial health of the business and may sacrifice the best long-term solution in favor of short-term benefits. Thus, the need for negative working capital.
When the working capital of a business’s current liabilities exceeds its current income and assets it is called “negative working capital.” A temporary negative working capital usually occurs when the operation makes a large purchase, such as acquiring new equipment or investing in more stock or products.
No business wants to put itself in a position where it can’t pay workers or its bills, but dipping into negative working capital isn’t always a risky move. Although not always viewed as a positive, there are some industries and quite a few businesses that experience negative working capital without feeling the pinch.
The “working capital cycle” is the time it takes to turn current assets into money in the bank. A “negative working capital cycle” is when a pressure cleaning business collects money at a faster rate than the time required to pay its bills—in other words, creating an out-of-sync cash flow. This means the pressure washing business has freed-up a temporary cash excess that would otherwise be stuck in the cycle, for use elsewhere.
A business that has negative working capital has little room to take advantage of any opportunities encountered to expand or take over other rivals. It is important, obviously, for a pressure cleaning business to have a good handle on its standard working capital cycle in order to understand when or if it can afford to use negative working capital to cover bills, payroll, or the operation’s other expenses with no risk.
How does an owner or manager know how much working capital their operation has? Quite simply, working capital is determined by the pressure washing operation’s current assets minus its liabilities. Assets include accounts receivable, inventory, and cash on hand. Liabilities include payments and other expenses.
By now it should be obvious that working capital has a direct impact on the cash flow of every business. Since cash flow is the name of the game for all contractors and other business owners, a good understanding of working capital is imperative to make their venture successful.