How does Working Capital Affect my Business?

You may have heard the term before, but you may not be sure of what exactly it means. Working capital is the amount of cash in your business account combined with the value of your fixed assets. In finance, we talk about liquidity or liquid assets when referring to working capital. In layman’s terms, this is the money you can ‘put to work’ to run your business. It’s a vital component in every business’s financial toolkit. Put simply, it is the difference between current assets and current liabilities. Current assets mean the money you have in the bank and any assets that you can quickly convert to cash if you need it. Current liabilities are the debts that you will repay within the year. In other words, working capital translates into a company’s financial health.

Working capital is the amount of cash in your business account combined with the value of your fixed assets. It’s a vital component in every business’s financial toolkit.

POSITIVE VS NEGATIVE

Positive working capital could represent a significant potential for business growth. Easily accessible cash allows you to expand your product line, fund a new marketing campaign, or reach a new market. These investments in your company can generate additional revenue in the future.

If your working capital is weak or negative, you won’t be able to afford to take these steps. You might even fall behind on bills or obligations. This could result in a situation where you have more liabilities than assets. To meet your obligations, you might have to sell off assets or get funding.

Negative working capital can put you at risk of bankruptcy, and it can come from poor cash flow or business management. You must take a strategic approach to optimize your cash flow and increase your working capital. That’s how you can create a stronger, healthier, and more profitable bottom line.

BUSINESS GROWTH REQUIRES CAPITAL AND CASHFLOW 

Growth needs capital to support it. A business with financing that is flexible enough to support changes is in a position to grow. Businesses with a steady level of working capital are able to maintain optimal inventory and supply channels securely. It means that they have a safety net in an emergency. A well-managed approach to current assets facilitates long-term growth and expansion. A robust strategy is an asset to any marketplace business.

These are the three main benefits of a steady cash flow, along with associated opportunities:

Resiliency

Companies with higher amounts of working capital are more resilient and are much better positioned to respond to emergencies and unexpected events.

Flexibility

Companies with a good amount of working capital can quickly adapt to changes in demand, and unforeseen opportunities, which will ultimately result in better performance.

Investment opportunities

Companies that don’t need to worry about day-to-day operations can invest money in their own marketing and growth.

WORKING CAPITAL IN ECOMMERCE

Ecommerce companies have unique challenges when it comes to working capital. Since they have to buy inventory, wait for it to be delivered before they sell it, and then wait to get paid by marketplaces like Amazon. As a result, ecommerce companies can have huge sales figures and a strong business but often be short on working capital.

ACCESS CAPITAL TO SCALE

As an ecommerce business, you typically have to pay outgoing expenses before you generate income from your sales. Even though the sale itself happens quickly, it can take some time to see those funds. The truth is that you still need to cover your inventory, logistics costs, and marketing. Working capital can cover those expenses and help you to keep the business running smoothly. The reason we ask this in ecommerce is that the space has unique challenges. Ecommerce companies

For companies that need a temporary solution, the most risk-free option is often a capital advance. Unlike a business loan, which usually requires collateral, a capital advance is an advance on the cash you can expect from short-term sales. The lender essentially purchases a portion of your future business revenue and gives you the capital you need instantly.

Knowing how to access working capital, it’s a must-have skill for consistent growth.