Working capital is the life blood of your business. While most business owners are focused on profits, neglecting working capital can cause a lot of issues in your business, and make running it very stressful.
In this blog we will explore everything that you need to acknowledge about working capital which will help you and your business during tough moments and help you acknowledge the big opportunities when they appear.
What is working capital?
Technically speaking, working capital is the difference between the company’s current assets (which includes cash and any assets expected to convert to cash within one year) and its current liabilities. If your company has a positive working capital balance, not only is your business more likely to be stable, you’re also more likely to have the ability to invest in growth.
In practical terms, most businesses consider working capital to be money that can be used to fuel the day-to-day operation and meet short term obligations such as costs associated with contracts and clients, payroll, supplier expenses and more.
Why is working capital important?
Maintaining a healthy working capital balance allows your business to operate more smoothly as you’ll be in a better position to pay your obligations when they’re due. Not only does this reduce stress, it will also free up your mind to push your business forward and focus on growth.
Many profitable businesses fail due to cash flow issues, and this is often caused by having a negative working capital balance. If your business is going to net £200,000 by the end of the year, but you can’t pay your supplier invoices due next week, you business is at risk of failure.
What should I do if I don’t have enough working capital?
If your business doesn’t have enough working capital, or has the wrong working capital balance and is experiencing cash flow pressure, there’s many things you can do to help fix it and relieve the pressure:
- Reduce your customer payment terms so you get funds more quickly
- Increase your supplier payment terms so you have more time to collect in funds
- Consider an invoice finance facility to access cash owed to your more quickly
- Consider a revolving credit facility to meet short term obligations more smoothly
- Consider a company credit card
- Consider a trade/ supply chain finance facility to help make supplier payments more smoothly
- Refinance any existing finance agreements to extend the term, increase the cash available to your business and/ or reduce your rate so the repayments are lower
- Sell any assets your business isn’t using to raise additional capital
- Maintain strong credit control processes to reduce the risk of late payment
A mistake many businesses make when exploring solutions for working capital and cash flow issues is to take out a long term loan. While this is sometimes necessary, unless the underlying issue is solved, you’ll risk “losing the money” in the business as there’s a tendency to overspend when the funds are available. It can also increase costs and make future funding less available in the future for long term projects such as investment in growth.
If your business is experiencing cash flow or working capital issues, fill out our quick form, or leave your contact details and once of our team will be in contact to explore various solutions for your business.