Working capital is vital to your business as it helps you understand the amount of liquidity you have for operating the business on a day-to-day basis. To understand what your working capital is, you need to take a look at your current assets and subtract all the liabilities from it. This will allow you to see if your company is in a position to become successful for many years to come if you have low working capital amounts which can indicate you may need financial help to continue operating your business. The companies that have higher levels of working capital have liquid assets and it's easier for them to grow and expand their business.
The type of assets you have can contribute to the success of your business. Although you may have a lot of assets, they may not allow you to easily convert them to cash, which can leave you in a difficult financial position. Your working capital refers mostly to a simple calculation, if you have more debts than assets you have low or negative working capital. If you have more assets than debt, you have high or positive working capital.
Why is it so important to understand your working capital? The main reason is due to the impact your working capital has on your cash flow. If you have low working capital, your cash flow may end up going into the negative because you have too much money invested in your inventory. When you spend too much money on raw goods and inventory and your invoices are not being paid in a timely manner, it can cause problems for your business credit. Lenders will see you as a risk because you have missed payments with your vendors. As your business credit score lowers and negative information is being reported, you are less likely to qualify for other loans in the future.
You need to find a proper balance of working capital in order to properly run your business. A lack of working capital will force you to keep your business in the same state it is currently in for a long time as you may not have the option to expand it for awhile until you are able to build up your working capital. Having no or little working capital causes financial problems as you are unable to pay your short-term loans and other payment obligations. When your working capital is low, you are on the verge of losing your business because you can easily run out of money at any time. This can cause you to look for loans to quickly rebuild your cash flow.
One method you can use to help your cash flow is to use invoice factoring. This will provide you with more working capital as you are able to sell off your past due invoices to a factoring firm that will offer you 80% or more for the invoice total. Although you may see this bad thing because you aren't getting the entire invoice amount, it's actually a great option because you get money today, not in 3 months or risk never receiving your money because some customers flat out refuse to pay the invoice. Dealing with collections can get expensive and time-consuming so it's much easier to let another company handle it for you.
Another way to improve your working capital is to reduce your inventory. Strive to have a quick inventory turn around and basically having your products made to order. This way you aren't tying up money in the inventory where you have to wait for people to pay you in order to stay afloat.
Corporate Credit Concepts specializes in working capital. For more information about working capital and how it might benefit your business, please CLICK HERE for a free phone consultation.