Working capital
Working capital is the amount of cash you require to pay all
bills.
Working capital is typically the amount of money held in a cheque (or
operating) account. Depending on the frequency of paying and the size of
the organisation the treasurer should hold no more than two months of
working capital in the operating account.
To calculate working capital requirements, estimate the regular
payments per month as well as the regular receipts. If receipts are
regular (e.g. an annual grant or one off donation) then ignore them for
estimating your working capital requirements.
Example:
Total regular payments per month $3,000
Regular receipts per month $2,000
Working Capital $1,000.
Hold in operating account 2 x $1,000 = $2,000.
Benefits:
Knowing your working capital amount means that funds that are not
required immediately may be put into a savings or term deposit account
to earn interest generating revenue for the organisation.
Planning ahead for working capital requirements reduces stress and
potential cash flow problems.
Cash Flow:
An annual cash-flow can be drawn up to take into account the timing of
large receipts and bills which may be paid annually or quarterly.
This would then give an idea of the balance of working capital required
at any given time through the year.
Using the annual budget enables you to complete the projected
receipts and payments for each of the 12 months. The working capital
required for each month can then be calculated from the net cash
flow.
Example:
For example, a membership organisation which also holds semi-regular
fundraising drives prepares a simple budget for the following year. Here
is an excerpt for the first four months.
| Opening cash |
0 |
2,850 |
2,200 |
1,350 |
| Revenue |
|
|
|
|
| Fundraising |
5,000 |
- |
- |
1,500 |
| Members' subscriptions |
- |
- |
2,000 |
500 |
| Total revenue |
5,000 |
|
2,000 |
2,000 |
| Expenses |
|
|
|
|
| Insurance |
- |
- |
2,200 |
- |
| Rent |
200 |
200 |
200 |
200 |
| Repairs |
1,500 |
- |
- |
- |
| Telephone |
100 |
100 |
100 |
100 |
| Wages |
350 |
350 |
350 |
350 |
| Total expenses |
2,150 |
650 |
2,850 |
650 |
| Net Cash Flow |
2,850 |
2,200 |
1,350 |
2,700 |
