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Working capital matters. Find out why.

The unprecedented events over the last year have business owners evaluating their working capital more than ever before. Analyzing the working capital needs of a business presents opportunities to leverage a line of credit, improve cash flows, and better plan for the future.

With the current low interest rates, more companies are better able to leverage their line of credit. Having a line of credit can provide significant benefits to a company, when used properly. The most prudent way to use a line of credit is for short-term cash needs or, in certain seasons, as a means for cash flow. A line of credit should not be used to finance a long-term balance. Instead, these needs should be addressed by obtaining fixed rate, term financing.

On the other hand, not using your line of credit or having significant unused borrowing capacity could result in a higher interest rate, personal guarantees, and/or more onerous compliance covenants. A line of credit with a lower limit may lessen these restrictive terms. 

In order for a business to use their line of credit effectively, it should analyze its  working capital needs. This is by no means an exact science, but here is a simple strategy to assist with this process: 

  • Gather at least two to three years of cash and line of credit balances at the end of each week. 
  • Create a graph with this data (line graphs provide for a great visual). 
    • First line = cash 
    • Second line = cash and line of credit balance (this is your working capital need)
  • Determine a trendline on your graph that will result in some line-of-credit borrowings but allow for it to be paid back in the short term. 
  • Ensure that the line of credit capacity is enough to meet working capital needs. At your lowest cash point, do you have enough capacity on your line of credit to meet your needs? 
  • Take note of any anomalies. These could include PPP funds, grants, initial shut down, etc. It can help to add another line on your graph to remove any anomalies (i.e., plot a line with your cash balance, less your PPP loan). 

It’s also essential to consider any changes that are anticipated with the business and forecast these changes. If possible, add forecasted data to your graph to help analyze future working capital needs related to expected cash and line of credit balances. 

Changes in your business to incorporate into your analysis could include: 

  • Customers extending their payment terms
  • Changes in existing customers, or new customers
  • Changes in the cost of materials, labor, etc. 
  • Working capital needed for new projects

Analyzing this data frequently and adjusting as needed is imperative, especially during these times of uncertainties. Business owners will need to recover, embrace,innovate, accelerate and continue to be agile. Our experts agree there are six areas that you should be focusing on as we move out of the pandemic and look ahead to 2021 and beyond. All of these will impact your bottom-line. Download our newest eGuide Creating Business Resilience: 6 Ways to Impact Your Bottomline 

If you have any questions about how SVA can assist your business, please contact the author or


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Marty Mathias is a Principal with SVA Certified Public Accountants. His specialties include performing assurance services including audits and reviews, mergers and acquisitions services, general business consulting, as well as fraud and litigation support services. In working with closely-held businesses, Marty’s work has included sales and operations analysis, budgeting, variable and fixed cost analysis, product pricing, and long-range business planning. In addition, Marty's services in SVA's Mergers and Acquisition group include preparing detailed financial projections; assisting in purchase and sale transactions and deal structure; and negotiating financing.

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