Deciphering Your P&L How to calculate your "working capital movement"
Q: I've recently been asked toshow working capital movement (WCM) in my profit and loss analysis.Could you please explain what WCM is and how I calculate it?I'm not an accounting genius so please treat me like a fool anddon't baffle me."
A: Thanks for the great question,but I can't really make you feel like a fool. Working capitalmovement is not a term I'm familiar with-neitheris my bookkeeper or accountant. We're assuming it has somethingto do with cash flow. Here's what I recommend:
Ask the person requiring this information exactly what heor she is looking for. Don't allow yourself to feelinadequate for your financial literacy level. This stuff isn'ttaught in school, and the term WCM isn't commonly used. You canlearn to be a financial whiz, and you're on your way by askingquestions.
Certainly cash flow management along with tracking currentassets and current liabilities is necessary. You can record currentassets (cash, accounts receivable and inventory) and compare themto current liabilities (accounts payable-bills that are due.)This is called current ratio. It tells you how solvent youare-how easily you can pay your bills. I suggest calculatingthis ratio on a weekly basis.
Take the inventory out of the equation and try it again. This iscalled the quick ratio or acid test. You'relooking for a 2:1 or better acid test to really sleep well atnight. If you're too tight on this ratio or if you have more incurrent liabilities than you do in current assets, then you couldbe going deeper into debt just to pay bills.
I've created short, simple explanations of the balance sheetand the income statement in my book, Where Did the Money Go? Check it out atwww.BareBonesBiz.com. Also look for the glossary onthe site-it's got lots of simple explanations of commonaccounting and finance terms.
The financials are just the scorecards in the game of business.Don't be intimidated by the lingo. Frankly, I think a lot ofaccounting and finance professionals use fancy words to impresspeople. The jargon is confusing. By asking great questionslike this, you're well on your way to financial literacy.
Author Ellen Rohr nearly starved in her family's smallcontracting business-until she learned how to manage money."Do what you love, certainly," she says, "but themoney won't just take care of itself." Ellen's priceycollege education didn't prepare her for real-world business."Financial business basics aren't that difficult...butwhere do you learn them? Unfortunately, business literacy isn'ttaught in school. I teach the basics and take the mystery out ofmaking money." Ellen's mission as an author, columnist andseminar leader is to help people make a living doing what theylove.
The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circumstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.
