Working capital may not be something that you talk about daily, but this is the key to the success of your business. It is related to many aspects of your business from paying your vendors/suppliers and employees to paying your utilities to make plans for future growth. Working capital is money that you have available to meet current short-term financial obligations.
Understanding Your Working Capital Needs
Gaining an understanding of your needs for working capital will likely require month-by-month plotting of inflow and outflow. For example, a landscaping company may find that revenues spike in spring and cash flow remains steady through October. Before dropping to almost nothing in late fall and through the winter. However, they likely have expenses that continue throughout the year.
When it comes to these calculations, you may need to make some educated guesses about the future. While you can use historical results to guide you, you will also need to factor in new contracts or the potential loss of important customers. If your company is growing rapidly, it can be challenging to make accurate projections.
This can help you identify the times when you have more outflow than inflow and when the gap is the widest.
4 Reasons You may Need Additional Working Capital
Seasonal discrepancies in cash flow
Fund obligations to employees, suppliers, and the government
Improve business in a variety of ways
Pay temporary employees or cover project-related expenses
How to Increase Your Working Capital
One way to augment your working capital is through an unsecured, revolving LOC. Credit lines can be used to finance temporary needs for working capital. The terms are more favorable, and you don’t have to use it all you can just take out what you need when you need it.
A business credit card can be a great way to cover incidental expenses, but it’s not ideal for working capital. This is primarily due to the higher interest, fees for a cash advance, and how easy it is to incur excessive debt.
How to Qualify for a Working Capital LOC
When applying for a LOC, lenders will look at your balance sheet. Including your working capital ratio, annual revenue, net working capital, and a few other things. Since the business and personal finances of a small business owner are often intertwined, lenders will also look at your financial health. You will be asked to make a personal guarantee of repayment.
Many things can affect the size of your LOC, generally, it should not exceed 10% of your business revenue.
Mistakes to Avoid
Be careful that you don’t confuse your short-term working capital needs with your long-term requirements
You may be tempted to use working capital LOC to fund a new piece of equipment or real estate or to pay your permanent employees, these expenses are different. If you use your working capital LOC, you won’t have it available to use as it’s intended.
Conclusion
Contact Achieve Capital Advisors to learn more about your working capital needs and what you need to do to prepare for various situations. You can’t predict everything. However, a clear understanding of working capital can help you prepare for the future.