Combating Working Capital Shortages

Working capital is all about maintaining the level of cash needed for day-to-day operations as well as managing the funds for investment in the marina or boatyard. Unfortunately, today’s tighter credit conditions along with inflation make managing working capital difficult but still essential.

Working capital is important because it is necessary to keep the operation solvent. By definition, working capital is simply the amount by which the marina or boatyard operation’s current assets exceed current liabilities.

Too little working capital means the business will soon be unable to pay its bills. Too much working capital means that the marina or boatyard is passing up the opportunity to put excess working capital to work elsewhere in the business or even to invest those unneeded, excess funds somewhere to produce extra income.

Measuring Working Capital
Any marina or boatyard operator who performs the calculation: current assets minus current liabilities, will arrive at the amount of working capital in their operation. Put another way, an operation’s working capital is made up of its current assets minus its current liabilities.

Comparing the amount of working capital today with the amount at an earlier date will indicate the amount and direction of change, which can be significant. However, not much will be accomplished insofar as determining the operation’s future working capital needs or, more importantly, how to meet them. All of which leads to the need for working capital management.

Working Capital Management
Working capital management is a strategy to ensure that a business operates efficiently by monitoring and using its current assets and liabilities to optimize cash flow. This is achieved by the effective management of the marina or boatyard’s accounts payable, accounts receivable, inventory, and cash.
A business should have enough cash available to cover both planned and expected costs, while also making the best use of the funds available to fuel growth. While managing it effectively is something of a balancing act, working capital is essential to the health of every business.

Improving the way working capital is managed can free up cash that would otherwise be trapped on the operation’s balance sheet reducing the need for borrowing and to fuel growth.

Capital Solutions
There are a number of strategies for effective working capital management including:

Electronic Invoicing. By streamlining the invoicing process, a marina or boatyard can reduce the risk of errors, automate manual processes and make sure customers receive invoices as early as possible -– which means quicker payments.

Cash Flow Forecasting. Forecasting future cash flows, such as payables and receivables, allows marina or boatyard operators to plan for any upcoming cash gaps and make better use of expected surpluses.

Reverse Factoring. For buyers, reverse factoring, or supply chain financing, is a way of offering a supplier an early payment via one or more third-party funders. Suppliers can improve their Days Sales Outstanding (DSO) by getting paid sooner at a low cost of funding — while buyers can preserve their own working capital by paying in line with agreed payment terms.

Dynamic Discounts. So-called “dynamic discounting” is another solution that buyers can use to provide early payments to suppliers, without the necessity of external funders since it is funded by the buyer’s early payment discounts. Like reverse factoring, this enables suppliers to reduce their DSO, while allowing buyers to achieve an attractive risk-free return on their excess cash.

Working Capital Funding
Some marinas and boatyards have enough cash reserves to fund their seasonal working capital needs, but that is rare. Fortunately, working capital can be created from a variety of sources. Most operations’ working capital comes from the earnings of the business. Other sources frequently include the sale of equipment or other unneeded assets, borrowed funds and, in some cases, the issuance of stock.

If a business, like the majority within the marina industry, experiences a need for short-term working capital, the most important thing is to plan ahead. To get caught off guard may mean missing out on one big order or one big sale or one great opportunity. Consider the following:

Flexible Funding. Working capital providers that offer flexible funding may allow buyers to move seamlesly between reverse factoring and dynamic discounting, allowing the marina or boatyard to adapt their verying working capital needs while continuing to support their suppliers.

Line of Credit. A line of credit allows the business to borrow funds for short-term needs as they arise. The funds are repaid once the operation’s accounts receivable is collected. Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for short-term needs only.

Working Capital Loans. Working capital loans can help cover temporary cash shortfalls or immediate business expenses. This allows a marina or boatyard operator to maintain daily operations and keep the business running soothly. Working capital loans focus on the operation’s immediate financing needs and often have shorter payback terms, usually up to one year.

The Government to the Rescue
Many lenders work with the U.S. Small Business Agency (SBA) to provide government guaranteed or backed financial assistance. One such program, CAPLines, is an umbrella program to help small businesses with their short-term and cyclical working capital needs. Included under this umbrella are four lines:

Seasonal CAPLine: A business uses the revolving or non-revolving loans solely to finance the seasonal increases of accounts receivable and inventory or, in some cases, associated increased labor costs.

Contract CAPLine. This line finances the direct labor and material costs associated with performing assignable contracts and can be either revolving or non-revolving.

Builders CAPLine. This line finances the direct labor and material costs of small general contractors or builders constructing or renovating either commercial or rental buildings. Here the building project serves as collateral and, again, the loans can be revolving or non-revolving.

Working CAPLine. This is an asset-based revolving line-of-credit for businesses unable t meet credit standards associated with long-term credit. The line provides financing for cyclical growth, recurring and/or short-term needs. Repayment comes from converting short-term assets into cash, which is remitted to the lender. A business continually draws down from this line of credit based on existing assets and repays as their cash cycle allows. This line is generally used by businesses that provide credit to other businesses. Because these loans require continual servicing and monitoring of collateral, additional fees may be charged by the lender.

Except for the Builders CAPLine, which cannot exceed five years, the maximum maturity on a CAPLine loan is 10 years. Holders of at least 20% ownership in the business are required to guarantee the loans.

Negative Working Capital
With strong working capital management, a marina or boatyard should be able to ensure it has enough capital on hand to operate and grow. However, there are downsides to the approach. After all, working capital management only focuses on short-term assets and liabilities. It does not address the long-term financial health of the business and may sacrifice the best long-term solution in favor of short-term benefits. Thus, the need for negative working capital.

When the working capital of a marina or boatyard’s current liabilities exceed its current income and assets, it is called “negative working capital.” A temporary negative working capital usually occurs when the operation makes a large purchase, such as acquiring new equipment, investing in more stock or products.

No business wants to put itself in a position where it can’t pay workers or its bills, dipping into negative working capital isn’t always a risky move. Although not always viewed as a positive, there are some industries and quite a few businesses that experience negative working capital without feeling the pinch.

A negative working capital “cycle” is when a business collects money at a faster rate than the time required to pay its bills. This means the business can free up cash quickly for use elsewhere that otherwise would be stuck in the cycle.

A marina or boatyard with negative working capital has little room to take advantage of any opportunities encountered to expand or take over other rivals. It is important, obviously, for an operator to have a good handle on his or her operation’s standard working capital cycle to understand if the use of negative working capital to cover bills, payroll or the operation’s other expenses with no risk is affordable.

Negative Going Positive
How does an operator know how much working capital their marina or boatyard has? Quite simply, working capital is determined by the operation’s current assets minus its liabilities. Assets include accounts receivable, inventory, and cash on hand. Liabilities include payments and other expenses.

By now it should be obvious that working capital has a direct impact on the cash flow of any marina or boatyard. Since cash flow is the name of the game for all owners, operators and managers, a good understanding of working capital is imperative to make any venture successful.

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