Last week I went to Florida to speak to executives from Copper and Brass Servicenters (which are like distributors, but they also will do some cutting and trimming of their merchandise). One of my themes in recent meetings with all types of business leaders has been that changes in the economy bring out new and different challenges. Working capital needs grow as the economy expands is one of my key points.
I walked into a large room of people who knew that intimately. Nothing new to them. It turns out that copper and brass prices have risen by more than 50 percent in the past 12 months. In simple terms, a wholesaler doing the same tonnage as last year has 50 percent greater sales in dollars. The company's working capital needs are roughly 50 percent higher. These guys have, for many years, lived with high volatility of their top-line sales, so they have learned about large variations in working capital needs.
What about your business? If your sales people come in waving new orders, and you are looking at a 20 percent increase in production, will you have the working capital to buy raw materials, hire new workers, get around to that deferred maintenance? You need a working capital projection based on optimistic assumptions, as well as your best-estimate projections. If you might not have enough working capital for good times to come, then you will not have good times. Turning away potential buyers is not good times.
There are steps you can take if working capital might be tight--and they are not what the traditional finance expert is thinking of.
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