Working Capital Mastery

Working capital = Current Assets - Current Liabilities. That's the textbook answer. Here's what it actually means: It's the cash trapped in running your business. • Cash sitting in unpaid invoices (Accounts Receivable) • Cash sitting in materials you bought but haven't used (Inventory) • Cash sitting in work you've done but haven't billed (Work in Progress) Minus: • Bills you owe but haven't paid yet (Accounts Payable) • Expenses you've incurred but haven't been invoiced for (Accruals) The LOWER your working capital, the LESS cash is trapped. That means more cash in your bank account for payroll, growth, and sleeping at night. This is counterintuitive. People think high working capital is good. For a business owner, LOW working capital (while staying healthy) means your cash isn't stuck.

When Josh took over CHE Companies, working capital was sitting at $4 million. That's $4M in cash the company had already earned or spent — just trapped in the cycle. By managing the drivers, he took it to $750,000. That freed $3.25 million in cash. No new revenue needed. No cost cuts. No layoffs. Just managing the timing of how money moves through the business. $3.25M is: • 2+ years of runway at most small companies • A down payment on an acquisition • Equipment for 3 new crews • The difference between begging your bank for a line of credit and not needing one The four levers he pulled: 1. Accounts Receivable — collected faster 2. Accounts Payable — optimized timing 3. Work in Progress — converted to invoiced faster 4. Deposits — collected upfront cash before spending Each one is a lesson in this course.

AR is usually the biggest chunk of trapped cash. Every day between "invoice sent" and "payment received" costs you money. Quick wins: • Invoice the DAY the work is done — not next week • Send payment reminders on day 1 after terms expire — not day 30 • Offer 2% discount for payment in 10 days (2/10 net 30) — you'll be surprised how many take it • Call on day 31 — don't email. Call. • For repeat offenders: require deposits or shorten terms Structural fixes: • Move to electronic invoicing (faster delivery = faster payment) • Set up autopay for recurring customers • Review your terms: are you at Net 30 when you could be Net 15? • Track DSO (Days Sales Outstanding) weekly, not monthly Target: DSO under 30 days. If yours is 45-60, you're financing your customers' businesses for free. On $2M annual revenue, moving DSO from 45 to 30 frees approximately $82,000 in cash. That's real money sitting in someone else's bank account.

This is NOT about slow-paying your vendors. That destroys relationships and supply chain reliability. It's about being STRATEGIC: • Pay on the due date — not early. If terms are Net 30, pay on day 30, not day 15. That's 15 extra days of float. • Take early payment discounts when they beat your cost of capital. A 2/10 net 30 discount = 36% annual return. Take it if you have the cash. • Negotiate better terms with strong vendors — if you're a good customer, ask for Net 45 instead of Net 30. • Consolidate payment runs — instead of paying bills randomly, do one payment run per week on the same day. • Use a credit card with cash back for vendors who accept it — 30 days of float plus 1-2% back. The key principle: match your AP timing to your AR timing. If customers pay you in 30 days, you should pay vendors in 30 days. If customers pay in 15, you can pay vendors in 15. The gap between when you collect and when you pay is your cash engine.

Work in Progress (construction, projects, services) and Inventory (product businesses) are the silent cash killers. WIP problems: • Work done but not invoiced — you spent the money, did the work, but haven't billed the customer yet • Overbilling or underbilling — your revenue doesn't match the actual work, creating phantom profits or hidden losses • Stale WIP — projects that stopped but nobody closed them out. Cash just sitting there. Fix: Bill as frequently as your contracts allow. Weekly if possible. Monthly at minimum. Review WIP aging every week — anything over 30 days unbilled needs action. Inventory problems: • Buying too much "just in case" — tying up cash in materials sitting on shelves • Slow-moving inventory nobody tracks • Obsolete inventory that should be written off but nobody wants to take the hit Fix: Track inventory turns. If something has been sitting for 60+ days, either use it, sell it at a discount, or write it off. Dead inventory is dead cash. For both: the question is always "how fast does cash convert back to cash?" Buy material → install it → invoice it → collect it. The faster that cycle runs, the less working capital you need.

The most powerful working capital lever: collect money BEFORE you spend it. Customer deposits: • Require 25-50% deposit before starting work (standard in construction, should be standard everywhere) • For new customers: higher deposit. For proven customers: negotiate. • Frame it as commitment, not distrust: "We schedule work based on deposits received" Progress payments: • For longer projects: bill at milestones, not at completion • 30/30/30/10 structure: 30% deposit, 30% at midpoint, 30% at completion, 10% after final walkthrough • Never let more than 30 days of work go unbilled Vendor negotiations: • Ask key vendors for extended terms — Net 45 or Net 60 • Offer loyalty or volume in exchange for better terms • Use supplier financing programs if available The math: If you collect a 30% deposit on a $50K job, you have $15K in cash BEFORE you spend a dollar. If your direct costs are 60%, you need $30K to complete the job. You already have half. Your working capital need just dropped from $30K to $15K on one job. Scale that across every job and the impact is massive. This is how Josh took CHE from $4M to $750K — every lever, every job, every month.