Managing your small business’s working capital is a delicate balancing act. A more aggressive strategy involves spending more in order to make more. A conservative approach, on the other hand, requires you to save working capital in order to lower your risk. Which one is best for your company? Keep reading to find out!
What is an Aggressive Working Capital Strategy?
An aggressive working capital strategy is designed to increase sales and revenue by creating a faster business cycle. Typically, you focus primarily on fast moving inventory or services in order to grow your numbers. An aggressive working capital strategy may also involve putting off bill payments, besides the bare necessities like loan payments and tax payments. You also wouldn’t hold much money in savings, leaving you at greater risk of running into serious trouble if you have a financial emergency despite your short-term growth.
What is a Conservative Working Capital Strategy?
A more conservative strategy for your working capital involves bolstering your business savings and managing your bills in a timely fashion. If your business involves inventory, you’d be working on growing the products you have on hand. You wouldn’t be at risk if you have a sudden shortage of cash, so this can be an effective strategy for seasonal businesses that need to keep operations going in the off-season even when sales are slow. On the downside, your cash isn’t earning you any returns, which can dwarf your business over the long term.
Finding the Right Balance
Like most things in life, the best results are usually achieved by using moderation. How aggressive or conservative you are with your working capital depends on your type of business, growth opportunities, and backup plans. If you’re too aggressive, you could face going into default or even bankruptcy if you can’t meet your financial obligations. But if you’re too conservative in your cash management, you could miss opportunities and stagnate your growth altogether.
The Bottom Line
A strong balance between these two strategies also sets your business up for better approval if you ever want to deploy more working capital through a small business loan.