Cash flow can be king for most businesses. To make it work, we need to get down to the details of looking at the working capital cycle:

1. When you have to pay for the goods you buy or the people who produce your product and services.

2. The accounts receivable, how long does it take you to collect on your bills? Also, what is your particular throughput time?

It becomes a balancing act between what you have to pay for and when you get paid.

Take a look at your business, what parts are out of sync? For example, take companies that provide temporary staffing solutions. Key thing for their working capital cycle is looking at when do they get paid versus when do they pay their people.

This can often break down into two different parts- whether the producers they put in the field are employees or are they outside contractors.

Outside contractors are dealt with on a 1099 basis. I’ve seen several firms in the industry and, generally, what I see is that the 1099 people are paid after they have received payment from their clients. In that case, there’s not a gap in the working capital cycle. They are not out of pocket, so the working capital cycle is practically zero.

However, that’s not always the case. There are some companies that say they will pay 1099 people within a set period of time and that can lead to a negative working capital cycle. It could take them longer to collect, so if they promise a contractor payment in 30 days, and it takes 45 days to collect, that means 15 days of working capital that they have to fund.

Then there are employees of the firm. Now, generally, these are going to be paid on a pretty regular basis every week or semi-monthly. Very often, they’ll be a working capital gap due to this. If the employees are paid in 15 days and it takes that 45 days to collect payment from clients, you’ve got a negative working capital cycle, about 30 days.

That’s an illustration with one type of business on how to look at it. Consider taking a look at others, your industry, on that same basis. Where is the biggest stretch in your working capital cycle? What could be done to shorten that?

As an example, one well known company probably actually has a negative working capital cycle- that collects before they have to pay. That company is Amazon. They collect right away when the goods are shipped by taking payments are credit cards, but they probably have several days or longer to pay for the books or other materials that they are sending you. Growth isn’t hard to fund because with growth more money comes in faster.

Now, you might also have to think strategically. It may be worth it to you to have a number of days in working capital that, perhaps, allow you to be more competitive. In the staffing firm example, it might allow you to attract better contracts or to attract more customers, so know that is a cost and know what you’re getting into.

Cash is king. No better way to treat it royally than knowing and improving your working capital cycle.