Working capital is defined as the money that you use in your business’ daily operations – usually your existing assets minus any current liabilities.
Why Is Working Capital Important?
For many businesses, working capital provides the extra financial cushion. While you can still keep your doors open even with negative working capital, you may not be as prepared for emergencies or future obligations. See why working capital is important below.
Working capital can provide:
- Opportunity for growth and expansion: Working capital offers a way for you to fund a bigger location, add more equipment, or other ways to grow your operations.
- Stability during ups and downs: Some businesses are seasonal, which means you may need working capital to help you get through times when business is slow.
- Emergency cushion: Businesses can get hit with lawsuits, you may lose a big customer, or another emergency can happen. Working capital gives you the funds you need during these times of crisis.
- Repayment for short-term debt: When you have working capital, you have the resources to pay off your short-term debt obligations.
Where Do I Get More Working Capital?
Many businesses don’t start off being profitable, which means that they need to find additional sources of capital to fund their growing business. Where do you look? You can turn to small business loans, merchant cash advances, invoice factoring, or other working capital loans or lines of credit.
When deciding which option is right for you, always know the costs, the fees, the qualifications, and how these loans will affect your long-term growth.
How to Monitor Working Capital
- Keep a running tab of all of your assets and liabilities to know your working capital.
- Prioritize the capital that you need, such as operating expenses, taxes, equipment, marketing, and other expenses you need day to day.
- Create a baseline number that you want your working capital to remain at. Use this as a guide and track whether your working capital remains stable or fluctuates.
- Put aside set aside a comfortable amount of funds that you will need for a cushion.
Understanding your business’ financial position is crucial to maintaining profitability and staying on track for further growth.