Understanding & Benchmarking Working Capital

Working capital is a crucial financial metric representing the difference between a company's current assets and current liabilities. In simple terms, it measures a company’s ability to cover its short-term obligations with its short-term assets. For businesses in the green industry—landscaping, lawn care, hardscaping, and similar fields—managing working capital effectively is essential for maintaining smooth operations and ensuring financial health.

Why Tracking Working Capital Matters

Tracking working capital is vital for several reasons:

1. Liquidity Management: It ensures that the business has enough liquidity to meet its short-term obligations, such as paying suppliers, employees, and other operational expenses.
2. Operational Efficiency: Efficient working capital management can improve a company's overall efficiency by optimizing the use of current assets and liabilities.
3. Financial Stability: Adequate working capital helps maintain financial stability and can provide a buffer against unforeseen expenses or economic downturns.

Factors Affecting Working Capital

Several factors can influence the working capital of green industry businesses:

• Seasonal Demand: Green Industry businesses often experience seasonal variations, affecting cash flow.
• Inventory Management: Excessive landscape material on hand can tie up capital, while insufficient inventory can lead to lost sales.
• Accounts Receivable and Payable: The timing of receivables and payables can impact the liquidity of the business.

Understanding Current Assets and Current Liabilities

Current Assets are assets expected to be converted into cash within a year. Common examples include:

• Cash and Cash Equivalents: The most liquid assets, readily available for use.
• Accounts Receivable: Money owed by customers for services rendered.
• Inventory: Supplies and materials used in providing Green Industry services.
• Prepaid Expenses: Payments made in advance for services or goods.

Current Liabilities are obligations expected to be settled within a year. Common examples include:

• Accounts Payable: Money owed to suppliers for goods and services received.
• Short-term Loans: Loans and other financial obligations due within a year.
• Accrued Expenses: Expenses incurred but not yet paid, such as wages and utilities.

Example: Working Capital Breakdown for a Green Industry Business

Let’s break down what the working capital looks like for a green industry business with $150,000 in current assets, and current liabilities of $100,000.

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Current Assets – Current Liabilities = Working Capital

$150,000 - $100,000 = $50,000

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In this example Working Capital is $50,000.

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Industry Benchmarks

The example above shows a healthy level of working capital. Ideally, it’s best to shoot for a ratio of Current Assets to Current Liabilities of over 1.5. This ratio is called the Current Ratio. Above a ratio of 1.5 indicates a strong ability to meet short-term obligations and invest in growth opportunities.

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Current Assets ÷ Current Liabilities = Current Ratio

$150,000 ÷ $100,000 = 1.5

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2023 Green Industry Median:

• Installation-based services Current Ratio: 1.41
• Recurring services Current Ratio: 1.59

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Installation-based services often involve higher upfront costs and longer project cycles, leading to tighter cash flow. On the other hand, recurring service businesses, like lawn care, benefit from more predictable and frequent cash inflows, thus allowing for slightly higher working capital and current ratio figures.

Regularly monitoring and managing working capital helps ensure your business remains financially healthy and resilient in the face of market fluctuations. By understanding and optimizing working capital, green industry businesses can achieve better financial stability and operational efficiency.

To learn more about our green industry accounting, advisory, and tax services, click here.