Working capital is the lifeline of your business. It keeps things moving and running. A halt in the working capital could spell the death of your business. It is, therefore, imperative that you keep a firm hold on your business’s working capital and manage it very well.
What is working capital?
But what exactly is working capital? How do you define it? From a purely accounting perspective, working capital is the net cash you get after subtracting current liabilities from current assets. When we say current, it always means short term; like a year or less than one year. In simple words, we can say that working capital is the cash you need to run the day to day affairs of your business. This may include paying expenses, buying inventory, materials, paying off your vendors, etc. It helps your business remain afloat and solvent. A working capital crisis could cause you serious financial troubles. After all, what good business is if it cannot pay off its rents 2 months onwards? Accountants also calculate a working capital ratio to better assess the financial health of a business. They divide the total current liabilities over current assets to arrive at it. A ratio between 1-1.5 is considered healthy and acceptable. Less than 1 means your business is heading towards insolvency and more than 1.5 is also not good. It implies that you have idle cash lying with you and you are not putting it to good and productive use.
How much working capital does your business need?
So, how do you assess the working capital requirements of your business? Well, it depends on the nature of your business, its scale, and your capacity to utilize capital. You can forecast the working capital requirements of your business by keeping into account all your expenses and payments and the expected inflows of cash. You would arrive at a figure and that is the amount you must keep handy with you at all the times.
Growing your business with the working capital:
To grow your business, you need to keep a track of your cash inflows. You must be mindful of your debtors and get your dues cleared, invest in new inventories, and increase your sales. This will keep your business running and you can plow back your profit, or part of it to expand your business. You must also keep the expenses in check and do not be extravagant. While making money do not get carried away by the temptations of making more money and always remain within limits. Do not chew more than what you cannot swallow. Otherwise, your cash matters would be in jeopardy.
Managing your business’s working capital:
For raising your working capital, you should consider increasing your revenue streams. You can also borrow money from banks, friends, investors, or venture capitalists. Mr. Joshua Triplett, Owner, Executive Principal, and Managing Partner of VIP Capital Funding stresses that small businesses need to be extra careful of their working capital needs and should look for alternative and cheap sources of financing if they want to grow and expand further.