Why is working capital imperative for small businesses?
Published on 2021-08-05
Category: Business Growth, Small Business Owners
Managing a small or medium-sized business is a challenge. In times riddled with a global pandemic, forest fires, and other natural disasters, hard times bring economic uncertainty. Small and medium-sized businesses have shut down, re-opened, found it difficult to employ staff due to lack of applications, qualifications, and poor compensation among myriad other reasons. Businesses that were weathering the shocks of disasters are limping back to normalcy and the Australian business community at large is ready for a post-pandemic boost.
"Chasing Payments: No longer just the nightmare of a freelancer"
There might be times when there is a gap between the service you provide and the payment you intend to receive in exchange. If the payment does not come through, your business might be disturbed. New orders pile up, your suppliers need to be paid, your employees have to be compensated to ensure the day-to-day workings of your business are not interrupted.
What is Working Capital?
Is a pool of cash to cover the chasm between your client’s delay in payment and your everyday business commitments. This very useful sum of money that is used to maintain business solvency, is called working capital.
Working Capital Vs Net Working Capital
The two terms may be used interchangeably, but they denote separate meanings.
Net Working capital is the difference between current assets and current liabilities, where assets refer to the properties your business owns that can be liquidated for cash and liabilities are the outstanding bills and short term burdens just around the corner. Working Capital, however, can refer to your current assets alone.
Taking Stock: The Three Key Factors
The cash conversion cycle helps you get a bird's-eye view of your business.
- Inventory Days:For how much longer can you maintain inventory and pay your workers? For how long can maintain a quality product or service before you cut corners, and the quality starts deteriorating?
- Debtor days: How long till your customer/client pays you for your service?
- Creditor days: How long can your business last till you have to pay your suppliers?
These factors help answer important questions, namely: When does the money go out, and how long it takes to come in? Does your business have the means to generate cash over a specific period?
In mathematical terms, the cash conversion cycle is = (Inventory days + Debtor days) - Creditor days.
Where working capital eases the burden:
- Day-to-day business operations
- Paying short terms expenses
- Wages to staff
- Boosting inventory
- Income tax payables
- Safeguard against seasonal fluctuations
Paying close attention to the needs of your business and planning for rainy days keeps you abreast with the health of your business. If you find that you’re a little short on working capital, reach out to us at Capital Boost. After an in-depth analysis of your business, we connect businesses like yourself to lenders who understand your unique challenges and requirements.
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