Capital
What is working capital and how much do I need?
The money that pays the bills between buying and getting paid. Add up a month of costs and the time until you're paid; lacking it closes companies.
bairogonzalez.com team, drawing on Bairo's story · Published
Working capital is the money that keeps the business standing in the gap between paying and getting paid. You buy raw materials today, pay rent and wages on the 5th, sell by card in installments and only get paid weeks later. In that gap, someone has to pay the bills. That someone is working capital.
That's why companies that sell well also go under. In Sebrae-SP's "Causa Mortis" survey, 39% of owners of companies that closed said they opened the business without knowing how much working capital they would need.
The practical path
- List a month's fixed costs. Rent, wages and payroll charges, the owner's draw, the accountant, internet, software, fixed taxes. Add them up.
- Find your cash cycle. On average, how many days does the product sit in inventory? How many days do you take to get paid by customers? How many days do you have to pay suppliers? Cash cycle = days of inventory + days to get paid − days to pay.
- Do a rough calculation. A simple way: (daily operating cost) × (days in the cash cycle). If the business spends R$1,000 a day to operate and the cycle is 40 days, you need something close to R$40,000 in circulation. Add a margin for weak months.
- Shorten the cycle before taking a loan. Negotiate longer terms with suppliers and shorter ones with customers, encourage payment up front or by Pix, cut idle inventory. Every day less in the cycle is money you don't need to borrow.
- Be careful with advancing receivables. Getting card sales paid early solves a squeeze, but it has a cost. If it becomes a habit, the problem is price or payment terms, not cash.
- If you need credit, use the right kind. Working capital lines exist at banks, cooperatives and in programs such as Pronampe, for companies that meet the rules. Compare the total effective cost and simulate the installment in your worst month, not your best.
- Separate the company's money from your own. Without a separate account, there is no way to know how much working capital you have.
This page offers general guidance. For your business's numbers, an accountant can do the math with you.
How Bairo went through it
Bairo Leandro Gonzalez Martinez says he went through the hardest way of discovering the value of financial breathing room. After reinvesting the capital he had built up from events and digital printing as an investing partner in a company, he saw the business, which was not what it seemed, stop holding up. Many people depended on him.
When many people depend on you, a lack of cash stops being a number on a spreadsheet and becomes a sleepless night. That is where the way he measures everything today comes from: in lifetime, his own and that of the people who are with him.
The Method step
Working capital is at the heart of step 5 of the Seventh Attempt Method: count in lifetime. Divide the money available by your monthly spending: that is your runway, in months. Write down your red line, the point at which you stop, cut back or ask for help, and decide it today, with a cool head.
Discover the Seventh Attempt Method