Many business owners focus on the numbers on their balance sheet without paying attention to their cash flow needs. To keep your company running and help you expand your business, you must take charge of your working capital. Otherwise, you risk financial insolvency.
What Is Working Capital?
A company’s working capital is the money that is used to finance its daily operations. The more working capital your company has available, the more stable it is in the short term. Your working capital is necessary to pay your current expenses, including payroll, materials, and the other operating costs of your business. Obviously, running low on working capital puts your entire company at risk because failure to pay your expenses can be catastrophic.
How Working Capital Affects Businesses
Your working capital can be calculated by subtracting your current liabilities from your current assets. It’s very similar to paying bills as an individual because a company also has to be able to meet its financial obligations until it collects payments from customers. You must be careful what qualifies as working capital because some short-term assets aren’t as liquid as you might think.
Unpaid invoices are a great example. How soon can you turn those invoices into cash? If your customers have payment terms of 90 days or more, then these assets are anything but liquid and can’t be used to make payroll for the next 3 months.
Managing Your Working Capital
Why do businesses fail or fail to thrive? The single most important factor is cash flow or working capital management. If your company doesn’t have the funds to pay its short-term expenses, it can quickly lead to the liquidation of assets and eventually to bankruptcy. It’s vital for your company to constantly monitor and manage your working capital to ensure you have adequate funding for your daily operations.
To begin with, you must have a good understanding of how long it takes to get paid in your industry. If 90-day payment terms are customary, you probably can’t ask for less and remain competitive. However, you may be able to request similar payment terms from your vendors to help you stretch your funds until your invoices are paid, too.
How to Cover a Capital Crunch
Most businesses don’t discover the concept of working capital management until they’re already feeling the crunch. Now you need some helpful suggestions on how to keep your business running and fund your expenses until you can collect on your outstanding invoices. For example, you can consider invoice factoring, where you sell your invoices at a discount to a financing company. This allows you to get paid right away while your customer still has their 90-day terms. Another option is to apply for working capital loans in Savannah, GA or throughout the country. These can get you out of a short-term cash crunch and on the road to prosperity.
The Importance of Working Capital Management for Your Business
Our CEO Ian discusses cash flow and working capital in #TheMoneyFactor below!