How Important Is Working Capital For Your Business

29 April of 2015

The problem with running a business is that you’re never quite sure exactly how much money you need. Having enough capital on hand is often the difference between thriving and barely surviving. Here is what you need to know about the importance of working capital and how to find it from legitimate sources.

What Is Working Capital?

To understand working capital, you must first familiarize yourself with the concept of current assets. These are the tangible possessions your company has that convert quickly to cash. So, money itself is the ultimate current asset, while anything else you can quick sell for money also qualifies. Think of current assets as anything you own that maintains liquidity.

Working capital is the total of your current assets subtracted by your current liabilities. In other words, the amount of working capital your company claims is the difference between your liquid assets and your outstanding debts.

Why Does Working Capital Matter?

The amount of working capital you possess directly determines the financial outlook of your business. Without working capital, you are unable to pay for the various goods and services you need to sustain your company. As such, correctly determining the current amount of working capital is the difference between success and failure.

The additional difficulty in evaluating your working capital is that it’s dependent upon your industry. If you are a seasonal company or prone to lower revenue during certain parts of the year, you need more working capital to cover the downtime. For instance, the holiday period from the Friday after Thanksgiving through Christmas Day is the most important sales period for retailers. Anyone who fails to maintain the flow of working capital to produce goods during this timeframe misses the financially lucrative window.

Any moment when you wind up lacking in working capital funding is one where you run the risk of failing to pay your employees as well as the other merchants with whom you do business. At a minimum, your company will stagnate without working capital. The doomsday scenario is that you must declare bankruptcy. This occurs because banks are less likely to authorize loans to businesses experiencing issues with liquidity.

What Do You Do If You Run Out of Working Capital?

There’s no feeling more chilling than realizing that your company lacks liquidity. If you have no working capital, the temptation exists to attain some by any means necessary. It’s a panic move that happens all too often. You wind up borrowing money with unfavorable loan terms. You’ll pay higher interest rates while suffering harsher terms such as early repayment penalties.

Fortunately, there is a better option for businesses struggling with liquidity issues and/or shaky credit history. Bad credit business loans empower you to gain the operating capital you seek via a simpler payment system. You pay off your debt via future revenue. It’s a straightforward path to loan repayment that is less risky than high interest loans.

Managing working capital effectively is tricky. Fortunately, it’s easy to track once you understand its importance. Even if you fall behind, there are safe loan options for savvy business people.

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