It is no secret that the financial health of a business is a great determinant of its overall success. Oftentimes when we talk of the financial health of a business; the focal point is always the profits made. But do merely profits suffice in the growth of a business? Profits surely have a significant impact but they are not the most important component of the financial establishment.
What do you do when despite being in profit you cannot carry out your usual operational tasks? Such a scenario could occur when you deliver your services and are expecting a profitable amount but the payments are not being made in time. This is where working capital comes to the forefront.
What exactly is working capital? Working capital is the capital available at hand which helps you run your day-to-day business practices. It is often referred to as the difference between a company's current assets and current liabilities. Current assets incorporate all the cash, inventory, and accounts receivable which can be liquidated to cash within a term of one year and current liabilities consist of the bills and loan payments you must make in a year. This implies to calculate working capital; one needs to find the difference between current assets and current liabilities; the result of which must be positive. A negative result indicates you have a deficient working capital and might run out of cash sometime soon.
At such times; it is very likely you will be alarmed and anxious about what can be done. Fret not; there are several firms offering working capital loans, which will keep your business running. These are often lent out for a short duration with low premiums. One issue, however, is that the process of approval and dispersal of loans is very time-consuming and complicated. Although there are certain firms that understand your needs and offer easy processing, which lets you avail of the business loan smoothly.
But why is working capital really important for a business to succeed? Read on to know!
Downtimes are experienced by every organization once in a while. If you run a business that is seasonal in nature especially; you are inevitably going to face significant fluctuations in your business. At times of high demand, there is a great probability that you will have to hire extra workers, increase your inventory and so on. Having an estimate of your working capital will allow you to be prepared in advance and help you carry out the seasonal operations effortlessly. Even if you are not a seasonal business; you could face downtime and having a strong working capital will surely help.
Being prepared for emergencies
Emergencies never announce their arrival. You can never guess when an emergency will strike. These could be in the form of sudden client withdrawal, damage by a natural disaster, lawsuit case and so on. Such circumstances can significantly impact the budget of your business. With a good amount of working capital, you will be able to tackle unexpected costs with ease and it might also help in risk tolerance.
Fulfilling short-term obligations
There are several short-term obligations you need to fulfil. These could be in the form of debts, purchasing inventory, worker salaries, equipment purchases and so on. All these obligations and liabilities can be easily fulfilled with strong working capital.
Attracting investors or obtaining credit
When you are trying to seek the help of a creditor or are trying to attract and impress an investor; they will analyze and research your business. If they come across an insufficient amount of working capital; they might take it as a red flag and withdraw themselves from the deal.
Growth and expansion
Everyone wants to get their business to the next level. You too might be wanting to expand and get your business to great heights. With strong working capital, you are well-equipped. It will allow you to take instant decisions and actions and will help you source everything you need to thrive. If your business has a negative cash flow, however; you might be restricted to pursue what you want and it will be a significant hindrance in your way to growth.
Peace of mind
Having low funds at hand will keep you apprehensive most of the time. You will constantly be ‘on-the-edge’ wondering what if something goes wrong and causes extensive financial damage? Having enough working capital will keep you at peace that you are covered at all times and can face any difficulty that comes your way.
Profits surely are an important aspect of your business’s financial state, but what truly guards your business against challenges and is the key tool to keep your business afloat is the working capital. Therefore, make sure you put in greater effort to maintain records of it and have adequate working capital in your possession.
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