It is undeniably important for business owners to understand what working capital is and how much working capital is needed in their business. In order to sustain a business and to eventually grow it, business owners need to learn to look at the long-term in order to decide which aspects should be invested on and which areas of funding should be cut back on.
Working capital is calculated as current assets minus current liabilities. It is a measure of the company’s short-term health financially, as well as a measure of a company’s efficiency. If you are a business owner and you are struggling financially to pay off your business’s short-term debt or are looking to expand your business, you may consider taking up a working capital loan for your business.
Importance of Working Capital
First, let’s take a look at the importance of working capital. A business’ working capital is essential in sustaining its daily operations. Such capital is used to pay off short-term debt of the business. If your expenses exceed your income, it will be difficult to pay off any debt on time.
Determining How Much Working Capital Your Business Needs
The amount of working capital required by each type of business differs. For example, a retail business would require a lot more working capital to finance its operating and inventory expenses as compared to a service-based industry. In order to determine the amount of working capital your business needs, you will need to take a look at your operating cycle and understand it. The operating cycle includes:
• Inventory: Net products that have yet to been sold.
• Accounts Payable: Money that your business owes to its creditors, such as suppliers. This includes other expenses like operating expenses, and the business’s payroll.
• Accounts Receivable: Money that debtors owe to your business, such as from a sale of a service or product that has yet to be paid.
• Growth: The projected growth of your company.
• Timing: How long it takes to receive accounts receivable and accounts payable, and the amount of time needed for products in your inventory to move.
By looking at the operating cycle, you will understand more about the cash flows within your business. With more working capital, the business can grow at a faster pace as they are able to afford things like bigger inventory, newer equipment which lead to better expansion opportunities. However, if businesses do not have sufficient working capital, they may need to take out a loan.
What if Your Business Requires More Working Capital?
If businesses are seeking opportunities to expand, often they need additional working capital. In such cases, it might be feasible for these businesses to take up a working capital loan to tap on these opportunities to expand.
When thinking about the future of your business and how much working capital it requires, it is important to look at the big picture long term so that you business can continue to expand and thrive. This is the best way to keep your business from remaining stagnant. If you are a business owner and you are looking to get a working capital loan to help your business grow, contact us and find out more about the working capital loan we offer today!