18 AUGUST 2023 WorldWide Drilling Resource® Drilling Into Money Not Boring by Mark E. Battersby Combatting Less Available Working Capital 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 drilling operation or business for tomorrow. Unfortunately, today’s tighter credit conditions along with inflation make managing working capital more difficult but still essential. By definition, working capital is simply the amount by which the operation's current assets exceed current liabilities. Working capital is important because it is necessary to keep the operation solvent, but how does an owner or manager know how much working capital the operation has? Quite simply, working capital is determined by the operation’s current assets minus its liabilities. Too little working capital means the drilling business will soon be unable to pay its bills. Too much working capital means the operation is passing up the opportunity to put excess working capital to work elsewhere to produce extra income. 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. Working capital management is a strategy to ensure 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 drilling operation’s accounts payable, accounts receivable, inventory, and cash. Every drilling business should have enough cash available to cover both planned and unexpected 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. Many businesses have enough cash reserves to fund their working capital needs. If not, working capital can be created from a variety of sources. Much of 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. By now it should be obvious that working capital has a direct impact on the cash flow of any drilling operation or business. Since cash flow is the name of the game for all business owners and managers, a good understanding of working capital is imperative to make their drilling operation successful. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com
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