Did you know that nearly one in every five small businesses fails within their first year of operation?
The ability to scale your business quickly and efficiently is crucial to its success. As a business owner, you may be constantly seeking ways to achieve sustainable growth.
But did you know that the answer may lie within your own company’s resources? The hidden gem we’re talking about is working capital. It holds immense potential.
In this blog post, we will unravel the mystery behind working capital. We will also explore its various components and how it works. Keep reading to find out more.
WHAT IS WORKING CAPITAL?
Working capital is an important financial concept that every business owner should understand. It refers to the money available for the day-to-day operations of a business.
This includes paying bills, covering expenses, and investing in growth. Simply put, working capital is the difference between a company’s current assets and its current liabilities.
Often, businesses make funding mistakes by not paying enough attention to their working capital. This can lead to cash flow problems, which may prevent the company from growing or even staying afloat.
To avoid these issues, it’s essential to know the uses of working capital. You should also learn how to manage business finances effectively.
Some common uses for working capital include buying inventory, covering payroll, investing in marketing, and maintaining equipment.
By managing business finances and ensuring there’s enough working capital, a company can invest in its growth. It won’t have to worry about running out of cash.
HOW TO USE WORKING CAPITAL
Despite the many benefits of having working capital, many business owners don’t know how to properly use it. Here are several of the top ways that it can help you to grow your business.
Boosting Profit Margins
With higher margins, your company can generate more profit from each sale. This will allow you to invest in new opportunities and expand your business.
To increase margins, you can focus on cutting costs, raising prices, or improving the quality of your products and services.
The benefits of working capital become evident when you can use it to invest in better equipment, training, or research and development. This can lead to higher margins in the long run.
Maintaining a Healthy Inventory
Without enough inventory, you might miss out on potential sales. But having too much can tie up your working capital and lead to waste.
By carefully managing your working capital, you can strike the right balance between having enough stock to meet demand and avoiding excess inventory that can hurt your cash flow.
This may involve setting finance goals for inventory levels. You could also use data-driven approaches to optimize your stock management.
Leveraging Growth Opportunities
With a solid working capital position, you can be more confident in seeking new opportunities. This might include launching new products, entering new markets, or acquiring competitors.
Additionally, having access to working capital can improve your chances of approval for small business funding. It will be easier for you to finance larger projects that can accelerate your growth.
Adapt to Changing Market Conditions
With sufficient working capital, you can make strategic decisions to seize emerging trends, pivot your business model, or invest in new technologies.
This agility can help you stay ahead of your competition. You will be able to capitalize on opportunities that others might miss.
Recover From Difficult Times
Economic downturns, unexpected expenses, or temporary cash flow problems can all put a strain on your business.
With a strong working capital position, you can weather these challenges and continue to invest in your company’s future. You won’t need to compromise your growth plans.
CALCULATING WORKING CAPITAL
Calculating working capital is a straightforward process, it helps you assess your business’s financial health. To determine your working capital, you need to subtract your current liabilities from your current assets.
Current assets include cash, accounts receivable, and inventory. Current liabilities consist of accounts payable, short-term debts, and other obligations due within a year. The formula for working capital is:
Working capital = current assets – current liabilities
A positive working capital indicates that your business has enough resources to cover its short-term expenses and invest in growth. A negative working capital signals potential financial difficulties or cash flow issues.
HOW TO GET WORKING CAPITAL
There are various ways that you can obtain working capital for your business. Often, a combination of methods works best. One way to increase your working capital is by improving your company’s cash flow.
This can involve speeding up collections from customers, negotiating better payment terms with suppliers, and carefully managing your inventory levels.
By ensuring that money comes in faster than it goes out, you can boost your working capital. You will also have more resources available for daily operations and growth initiatives.
Another approach to acquiring working capital is through external financing. Additionally, alternative financing solutions like invoice factoring and merchant cash advances can provide quick access to cash.
Finally, strategic financial management plays a crucial role in securing working capital. By making data-driven decisions, you can optimize your working capital.
USE WORKING CAPITAL TO SCALE YOUR BUSINESS
If you want to scale your business, it is important to understand the benefits of having working capital.
Not only can you use it to boost your profit margins. It will also become easier for you to maintain a healthy inventory and adapt to market conditions.
Are you looking for a funding solution for your business? If so, Tiger Capital can help you.
We accept all credit scores and offer various funding options. Don’t hesitate to apply today!