Making Working Capital Work for Your Business
Simply put, when you take the current value of your company’s assets minus its liabilities, you’ll find your working capital. These are the funds used in day-to-day operations including paying employee wages, purchasing raw material, paying operating expenses, making debt payments, etc. It’s important to be aware of it because it gives you an overall look at how your company is doing. If it’s too low, you may need to take a closer look at your finances, and either find a way to increase your company’s assets or lower its liabilities. It’s also important to consider the type of business you’re in, and how easy it is to turn your company’s assets into profit.
If it’s falling short, there are a few ways to boost your capital until business picks up. Short or long-term business loans can be utilized for this purpose. Of course, this isn’t a permanent solution, but it can be a helpful crutch as your business takes off or works through a rough patch. These loans can help cover day-to-day costs until your business becomes more efficient overall.
Another option for increasing your capital is trade credit. This is still a form of credit, but it’s set up through a supplier rather than a bank. The supplier agrees to provide your business with goods now, then pay for them later. This is a way of decreasing your liabilities, but as with any credit there is risk involved, and usually some form of interest charges.
As your company’s income increases, and you no longer have to rely on credits or loans to maintain your working capital, you may be wondering what to do next. While it may be tempting to quickly spend your extra profit on more inventory or product development, it’s a better idea to build up a solid buffer of cash that can be used if business goes down. Once you’ve built up a comfortable buffer, let that capital finally go to work by paying off outstanding debts, give deserved bonuses and raises to employees, then push toward expanding your business.
Learning to make working capital work for your business, rather than being a slave to it, is vital in its success. Making it a company-wide priority and making constant effort to be more efficient will be the biggest helps when it comes to increasing this capital. A company with a higher working capital will be more attractive to investors, more profitable, and easier to grow.
