Working capital is the money your business uses to pay for day-to-day expenses. Eventually, every business runs short on occasion and will need a business line of credit or working capital funding to fill in the gaps.
This post discusses how to figure working capital so you can decide if your business needs working capital funding from an outside source.
The working capital cycle
The working capital cycle is the amount of time it takes to turn your goods/services into cash. The shorter it is, the better it is for your business.
There are four parts to the working capital cycle:
- Cash (liquid assets).
- Creditors (people you pay for inventory/services to make your business run).
- Debtors (your customers).
In general, your customers pay you money for the goods or services you’ve provided. You use that money to buy more inventory from your creditors. Then you sell that inventory to your customers, who pay you for it. This is the working capital cycle.
How to figure working capital
To figure out how much working capital you need to cover those hiccups in the cycle that put you behind, you look at your assets vs. liabilities. This is a simplistic form of the formula, as there are a million different ways to figure out what exactly your business’ assets and liabilities are. It’s best to talk to your CFO to figure that out.
If you have plenty of assets and not a lot of debts, you probably don’t need to seek out a business line of credit (for now). But if your debts are close to or more than your assets, you need to have a solution in place in case the numbers shift out of your favor.
What happens when you don’t have enough working capital to function
You may think your company can squeak by with barely enough working capital, and that may be true for a while, but it’s a bad bet for a long-term plan. Here are a few of the problems that companies with cash flow problems experience:
- Employee turnover: When employees find out you’re having cash flow problems, they’re going to start jumping ship. Worst of all, your most valuable employees tend to go first because they have the most appeal in the job market.
- Slower or no growth: With less to invest, growth will be slow to a snail’s pace. Stagnation is the first sign of death to many businesses.
- Missed opportunities: Opportunities have a way of knocking once, and if you don’t answer, they’ll go knocking on your competitor’s door. Without the capital you need to jump at chances that are “too good to pass up,” you’ll have to sit back and watch as your competition grows while you’re just trying to get by.
- Management stress: Trying to make ends meet is tremendously stressful for anyone, but especially for a business owner who is responsible for the lives of many other people. The stress of faltering cash flow can hinder your leadership and decision-making skills, and your business WILL suffer.
About Capital Solutions Bancorp
Capital Solutions Bancorp provides working capital funding to businesses just like yours every day. If your company needs working capital to grow, or if you’d like to have a backup plan in place for unexpected expenses, call Capital Solutions Bancorp today at 800-499-6179 or visit us online at www.capitalsolutionsbancorp.com.