If you have been in business for any length of time you probably already know that it’s all about the numbers. If you don’t understand your numbers, it will be very difficult for you to build and sustain a healthy business. One key business metric that you need to have a grip on is your working capital. In simple terms, your working capital is what you are left with after liabilities are deducted from assets.
None of these numbers are static, so it is important that you keep a very close eye on them and what’s happening inside your company’s financials. As for your working capital, it is a direct indicator in terms of profitability and your company’s access to liquid funds. Some of the things that working capital can impact are plans for expansion and attracting buyers should you decide to sell your company in the future.
It’s important to note that even successful businesses can have major issues with low working capital. At the end of the year, you may be profitable, but month to month access to capital can go up and down based on the length of your sales cycle, terms for unpaid invoices, and several other factors. Unfortunately, daily expenses, payroll, and other needs stop if you have periods of lower working capital.
If you are handling your working capital correctly, it can put a tremendous amount of power in your hands at times when it’s most needed. For example, if you are selling some kind of physical product, access to that capital can allow you to order extra inventory when there is high demand. If the demand for your product increases and you do not have the funds to order the required inventory, you are faced to turn to traditional bank loans.
However, if your company does not have access to suitable working capital in-house, you may be able to pursue some via short-term lenders. These loans are typically easier to get and are more based on company revenues versus approved credit. In addition, you don’t normally have to produce the same volume of paperwork in order to secure short-term working capital, and the money is normally available in a few days versus months.
In summary, working capital is very powerful because it allows your company to take advantage of opportunities. It may allow you to capitalize on a seasonal buyer’s rush, purchase needed equipment, or obtain new real estate without being tied into paying high interests rates for years down the road. Let’s face it, gone are the days of having quick approvals for funds from your local banker, so finding ways to access working capital are critical to the overall success of your company.
If you are serious about expanding your business on a regular basis, and possibly having a profitable exit in the future, your working capital will play a major role. Learn it, understand it, and make a commitment to use it properly for the betterment of your company.
Apply for a business loan with SMB Compass.