So what is working capital?
Every business needs working capital regardless of whether they’re brand new or celebrating their 10th anniversary. A regular amount of cash is required to make recurring payments, cover unexpected costs, and purchase basic materials used in the production of goods. However, this is the bare minimum for what a company needs to function day-to-day.
Let’s assume you’re a small business owner and you need to grow if you want to keep up with industry demand. There’s a lot of opportunity out there, and working capital is the key to converting that opportunity into revenue. Working capital can be utilized to hire more employees, buy more storage space or purchase trucks or other equipment.
Are you already overwhelmed by all of the business rolling in?
While this sounds like a dream to a young, green entrepreneur, creating manageable growth is the first step to ensuring long-term success. If it’s not managed strategically, you could either spread yourself too thin or miss out on a lot of lucrative opportunities.
Are you lacking the tools you need to do your best work?
If your productivity isn’t efficient, or you’re not marketing yourself properly because you don’t want to spend a little more money, you might be spending more than you’re bringing in. In that case, it might be time to re-evaluate your current operations and give yourself more options with your budget.
The good news is there is ALWAYS business to be made. It’s vital you take time to plan, do things right and not exhaust your valuable resources.
Practical uses for additional working capital
- If your current team is maxed out and you’re trying to squeeze your budget to hire some help, working capital will give you the breathing room you need. It can be your solution whether you want to open up a permanent role to explore a new sales territory or you want to hire on a temporary contract to tackle a special project.
- Seasonal differences in cash flow may be cyclical or by surprise, but either way you typically pay more for supplies or write more checks with overtime. Extra capital is often needed to gear up for a peak season, anticipated tourism or a holiday. Sometimes you may have to prepare to coast during a dry period with limited business.
- Working capital allows organizations to incorporate better spending strategies. For example, they can replenish stock by buying in bulk, make larger payments on loans to avoid interest, or save on recurring payments for digital programs by paying once per year.
- Even if revenue is fairly consistent year-round, it’s unlikely there’s a single business out there that has never experienced a time when additional working capital was needed. Employees make mistakes, equipment doesn’t last forever and professional relationships don’t always work out. Sometimes long-term customers drop their business, and working capital can help temporarily recover from a loss of recurring income.
- Perhaps there are environmental factors affecting your business such as supply chain delays due to a storm, or economic burdens such as inflation. There are certain comeuppances you can’t forecast but need to have a plan for anyway.
