Sometimes referred to as operating assets or net current assets, working capital is the amount of liquid assets that a company has at any given time. You can find this number by subtracting the value of all your business’s debts and others obligations from the value of all cash and other assets that could reasonably be turned into cash if need be. Working capital is important because you need it to pay for planned (as well us unexpected) expenses, to meet any short-term obligations, and to grow and expand your business. Now, what would happen if your business didn’t have working capital? It can discourage any investors or traditional lenders, slow down or even completely stop daily operations, and put a halt on the growth of your business.
A lack of good working capital can make it difficult for your business to attract investors. Traditional lenders, like banks, will also most likely view your business as high risk. Having adequate working capital will show investors and creditors that your business is able to repay a loan. A business’s working capital can be used almost as a tool to see how they handle their finances and if they can fund growth or contribute to shareholder value. Not being able to attract investors or lenders can prevent a business from purchasing the resources necessary to continue to stay afloat.
Slowing Down Daily Operations
Working capital shows that a business can turn short-term assets into cash, which is necessary to carry out daily operations. Poor working capital can make it difficult to pay salaries, make inventory purchases, or pay for equipment and other necessary expenses. This on hand cash is also used for dealing with unforeseen emergency expenses. If something comes up and there’s only enough capital to cover the emergency expense, with nothing left for daily business expenses, it can slow down operations tremendously.
Constricting Business Growth
Working capital is a major contributor to a business’s growth and future success. To grow and expand while meeting customer demand, businesses will typically purchase additional assets. However, lacking working capital can prevent a business from getting what it needs to expand. Without growth, your business’s customers could be lost to competitors in your industry.
Improving Working Capital
Although working capital includes current assets, businesses can experience cash-flow problems if their assets aren’t being converted into cash. Some methods to increase working capital are selling long-term assets for cash or increasing sales revenues. In some cases, a business might need a little extra help if they don’t want to do anything extreme, like selling their assets. Services like invoice factoring can help free up the cash in your accounts receivables, giving your business more working capital. To find out more about how we can help grow your business, contact us today!