Working capital offers protection to small businesses so you can ensure the continuance of your business operations. Whether you’re trying to weather a financial storm or wanting to take on a large order, it’s important to figure out how much money to borrow through a working capital loan. Here are a few steps you can take to get an accurate understanding of your business needs.
Determine Your Existing Working Capital
First, take a look at your current business debt obligations. Anything that is owed within a year is considered a liability. Next, subtract that number from your liquid assets, which is anything you could quickly and easily convert into cash to cover those debts. If you’re left with a positive number, you have at least some working capital. But if your debt minus assets is negative, you don’t have any kind of working capital cushion.
Consider Your Business Type
Despite existing assets and liabilities, the type of business you own also impacts how much working capital you need. If you sell products, for example, you may need higher amounts of capital to pay for inventory. Similarly, if you provide services requiring a large amount of human resources, you’ll need ongoing working capital for payroll. A sole proprietorship, on the other hand, may not require such intensive funding on a regular basis.
Plan for a Worst-Case Scenario
When figuring out how much working capital you need for any situation, make sure you plan for emergencies or unexpected expenses. It’s much easier to have one working capital loan and repay it early or use the funds for another business venture than it is to realize later that you can’t even accomplish your goal with the funds you took out. As a business owner, you probably already know that agility is one of the major keys to success. By preparing for the worst, you’ll ensure you actually have the ability to remain agile regardless of what kind of hurdle you meet in the road.
The Bottom Line
Creating a plan for your working capital is a smart business move. You’ll have the flexibility you need to meet your goals and get through temporary budget shortfalls.