Q: I've recently been asked to
show 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 and
don't baffle me."
A: Thanks for the great question,
but I can't really make you feel like a fool. Working capital
movement is not a term I'm familiar with—neither
is my bookkeeper or accountant. We're assuming it has something
to do with cash flow. Here's what I recommend:
Ask the person requiring this information exactly what he
or she is looking for. Don't allow yourself to feel
inadequate for your financial literacy level. This stuff isn't
taught in school, and the term WCM isn't commonly used. You can
learn to be a financial whiz, and you're on your way by asking
questions.
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Certainly cash flow management along with tracking current
assets and current liabilities is necessary. You can record current
assets (cash, accounts receivable and inventory) and compare them
to current liabilities (accounts payable—bills that are due.)
This is called current ratio. It tells you how solvent you
are—how easily you can pay your bills. I suggest calculating
this ratio on a weekly basis.
Take the inventory out of the equation and try it again. This is
called the quick ratio or acid test. You're
looking for a 2:1 or better acid test to really sleep well at
night. If you're too tight on this ratio or if you have more in
current liabilities than you do in current assets, then you could
be going deeper into debt just to pay bills.
I've created short, simple explanations of the balance sheet
and the income statement in my book, Where Did the Money Go? Check it out at
www.BareBonesBiz.com. Also look for the glossary on
the site—it's got lots of simple explanations of common
accounting 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 of
accounting and finance professionals use fancy words to impress
people. The jargon is confusing. By asking great questions
like this, you're well on your way to financial literacy.
Author Ellen Rohr nearly starved in her family's small
contracting business—until she learned how to manage money.
"Do what you love, certainly," she says, "but the
money won't just take care of itself." Ellen's pricey
college education didn't prepare her for real-world business.
"Financial business basics aren't that difficult...but
where do you learn them? Unfortunately, business literacy isn't
taught in school. I teach the basics and take the mystery out of
making money." Ellen's mission as an author, columnist and
seminar leader is to help people make a living doing what they
love.
The opinions expressed in this column are
those of the author, not of Entrepreneur.com. All answers are
intended to be general in nature, without regard to specific
geographical areas or circumstances, and should only be relied upon
after consulting an appropriate expert, such as an attorney or
accountant.