Many businesses in Thailand experience increasing sales every year, but face cash flow problems during the month. This situation is common, especially for SMEs that have to pay for raw materials, labor, rent, or inventory before receiving full payment from customers. This is directly related to working capital, which is a key aspect of managing liquidity in a business.
Even if a business is profitable, insufficient cash flow can negatively impact daily operations. Many business owners are therefore focusing more on managing their business's finances rather than solely on sales figures.
What is working capital?
Working capital is the difference between a company's current assets and current liabilities.
Simply put, it's money a business has for short-term operations, such as
- Buying ingredients or raw materials
- Pay employee salaries
- Pay rent
- Manage inventory
- Pay trade creditors
- Covering daily operating expenses
Businesses with sufficient working capital tend to manage expenses more smoothly and have more room for business planning.
On the other hand, if cash flow becomes tight, the business may falter even if sales are good.
How to calculate initial working capital
The basic formula commonly used is
Working capital = Current assets – Current liabilities
Current assets may include
- Cash
- Bank account funds
- Accounts receivable
- Inventory
The current liabilities section may include
- Accounts payable
- Expenses due
- Short-term loan
- Short-term debt burden
If the result is positive, it often reflects that the business has a certain level of sufficient liquidity. However, the number alone may not be enough; the context of each business must also be considered.
Why can a profitable business still face a cash flow shortage?
This is a real problem in many Thai industries.
For example, some wholesale businesses have high sales, but customers request 60-90 day credit, while the shop has to pay suppliers for goods within 30 days. This gap causes cash flow to become tight, even if the income statement looks good.
Restaurant businesses are similar. If you have to buy ingredients in large quantities in advance, but daily sales are inconsistent, it can lead to cash flow problems.
Another case is businesses that overstock. The products may still be sellable, but cash is tied up in inventory, leading to a shortage of funds for essential short-term needs.
Signs that working capital is starting to have problems
Many times, liquidity problems don't occur immediately, but gradually accumulate, impacting operations.
Common symptoms include
- Delayed payments to creditors/suppliers
- Postponing orders or purchases
- Cash in the account is continuously decreasing.
- Use the short-term credit limit more often.
- Rising overdue receivables
- Stock is moving slower than usual.
Some business owners believe sales are still good and don't closely monitor cash flow. However, when multiple expenses need to be paid at the same time, problems become apparent.
What types of businesses require special attention to working capital?
While all businesses should manage their liquidity, some types will be impacted sooner than others.
Wholesale and import business
Often requires purchasing large batches of goods and has credit terms with customers, causing cash to be tied up in the system for quite a long time.
Restaurant and cafe business
Raw material costs change quickly, requiring daily cash. If sales fluctuate, it can immediately impact cash flow.
Construction and Contracting Business
Some projects have long payment cycles, so business owners have to manage wages and costs while waiting for payment.
Fast-growing online business
Increased sales don't always mean increased cash, because advertising costs, inventory, and shipping costs may increase concurrently.
How to manage working capital to make your business more agile
There's no need for business capital management to be complicated from the start. Often, small behavioral changes can help reduce liquidity pressure.
Monitor cash flow regularly
Many businesses only look at sales figures but don't track when cash actually comes in and goes out.
Consistent cash flow projection helps you see tight cash periods in advance and plan more quickly.
Manage stock appropriately
Having products ready for sale is important, but if you store too much, cash will be tied up in inventory.
Many businesses are starting to monitor their inventory turnover rates more closely, especially during times of rising costs.
Reduce customer payment terms
Some businesses are starting to use installment payments or clearer payment terms to reduce their own cash burden.
Plan expenses by income cycle
If you know which periods have declining sales, you should plan expenses accordingly, such as postponing some investments or controlling unnecessary costs.
When a business needs additional funding
At certain times, businesses may need to look for additional sources of funding to help boost short-term liquidity or support business expansion.
Options that many businesses use may include,
- Business credit line
- Short-term loan
- Trade Receivables Management
- Cash flow management through financial platforms
However, each business has different needs. Considering repayment ability, cash flow, and business plans is also important before making a decision.
Working capital isn't just about "survival."
Many people see working capital as something used only for solving problems when a business is short on cash, but in reality, businesses with good liquidity management usually have more options.
When there is sufficient working capital, a business can
- Get marketing opportunities faster
- Order products at the right time
- Plan business expansion with increased confidence.
- Reduce short-term cost pressure
In a rapidly changing economy, cash flexibility has become important for many businesses in Thailand, especially SMEs that need to constantly adapt.
Frequently Asked Questions about Working Capital
How is working capital different from profit?
Profit is the difference between revenue and expenses, while working capital relates to liquidity and cash used in short-term business operations. A business can be profitable yet still be short of cash.
How much working capital should a small business have?
There's no fixed number, as it depends on the type of business, cash conversion cycle, and each company's fixed costs.
Does inventory affect working capital?
It directly affects it, as inventory is considered a current asset. If there is too much, cash may be tied up in goods.
Does a well-selling business need to worry about liquidity?
Necessary, because increased sales may also lead to increased costs and cash flow burdens.
How often should you track cash flow?
Many businesses choose to track weekly or monthly to see cash flow trends and prepare timely contingency plans.
Explore approaches to managing working capital for better business growth and expansion.
Understanding working capital is a crucial starting point for long-term business management. If you want to learn more about financial solutions for businesses, you can explore further details through Bettr
