Working capital is the liquid cash that a business can access to carry out the usual operations of every day. Thus, if you have to pay the salaries of your employees or even to pay the suppliers, this is crucial for you. This is the money you will have to manage the short-term payouts that are necessary and unavoidable.
Maintaining it is crucial, or your business will face some setbacks. A lack of it will affect your ability to handle the short-term financial obligations of the business. You will have to look for accessible lines of credit to plug the funding gap.
They can help you manage short-term financial bumps temporarily. You will have to work on improving the cash flow into your business. This will be a permanent solution to tackle small cash gaps that arebothering you as a business owner.
The condition of working capital can indicate the financial health of your company. It also indicates whether you are operating efficiently or not. If your business is running smoothly, you will not have to deal with cash problems frequently.
Dive deeper to understand the concept of working capital and its importance in a better way.
A complete insight on working capital and its significance
Working capital can be figured out by subtracting current liabilities from current assets. This is the money which will remain to cover the daily transactions necessary for the business. Current assets are resources that can be transformed into cash within one year.
Current obligations are the payments that your business has to cover within a year. When you will subtract, you will get the remaining amount that is available for sponsoring the daily cost of operations.
1. Can alternatives help in overcoming any small funding gap?
Options like business credit card can be used. However, whether or not it will work will depend on how smartly and responsibly you will use this tool. How can you take advantage of this option?
- Get funds now and repay later according to the billing cycle of the card
- Disburse important payouts on time despite lacking enough working capital
- Prevent temporary cash shortfalls from leaving a big impact
- Work on establishing business credit scores
- Monitor business expenses becomes easy
- Use it as a cash back up for urgent payouts when working capital is inaccessible
2. How to qualify for loans to cope with a funding gap?
Since you will be running a small venture, the lender will be keen to evaluate your business and personal finances. They might ask you to provide bank statement, pay slips and even tax returns. This is done to assess if you are capable to repay loans if business cannot generate enough revenue.
Depending on the amount you choose, you may or may not have to produce collateral. Getting a loan to support working capital will need you to showcase the business plan. It will have the financial projections to help lender understand how you are planning financially.
3. Why working capital is so important for businesses?
A single month observation is not enough to help you understand your requirements for working capital. You should be assessing the needs for a few months at a stretch. Then, you will get hold of how cash inflow and outflow is working in your business.
The type of the business will decide how you should map out working capital for error-free running of your business. This the money you should hold as a constant figure so that your business can operate irrespective of time.
The reasons why you must manage working capital effectively are:
- Indicates the liquidity of the business
It shows whether you have short-term cash available at your disposal. Then, paying for small necessities is not going to be big deal. Looking into it, you can tell whether the cash flow maintained is positive or negative.
When it is positive, you are supposed to have more assets than liabilities and vice versa. A negative cash flow might need you to explore external funding options like revolving line of credit. Again, a smart implementation of this tool can help or else it will drag you towards debts.
- Efficiency in operation
When you do not have to worry about working capital, you can focus on operations more. This will improve your efficiency and secure the future of the business. Thus, it indicates that there is no problem in inventory management.
Above all, you are paying all the bills on time because you have access to cash. Again, you are receiving all the payments on time as your working capital is in healthy condition.
- Progress of the business
If you have to stuck in the daily operations and manage funds, this will hamper the growth of your business. When funds are sufficient, your employees will be happy. You will be able to pay the vendors on time and receive the raw materials just when you need.
4. How to manage working capital effectively?
Now, you are the business owner and maintaining it is your task. You must understand one thing that your working capital will be in healthy state if you are able to optimise the current assets. Thus, you have to work on lowering the liabilities as well.
In short, you must know how to strike a balance between current assets and liabilities. The level should be such that it is productive for your business. This is the theoretical concept and you must understand the step-by-step format.
- Handle the inventory section and avoid overstocking
- Prepare invoice quickly so to keep the client informed
- Follow up if the payment has been delayed
- Look for ways on how to offer discounts and offers to receive payment on time
The bottom line
Different kinds of financing are available to help you in trouble times. You can use them to manage a situation when working capital is insufficient. However, you must reiterate if repayment will be easy on you or your business.
Getting external funds might be achievable given the flexible terms and conditions. Remind yourself how late payments can harm your business. An unending debt cycle might be created, and financial peace will be hampered.