How do you decide how much working capital your business needs? It’s really easy every single week to say “the business is bringing in x and we’re obligated to spend y.” As a business owner, you just hope that “x” is always greater than “y.”
Working capital, according to Investopedia, is “a measure of both a company’s efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets – Current Liabilities.”
If you’re always calculating “x” and “y” for the current pay period, you’ll never actually get ahead. It would be difficult to know what you can invest, and what needs to be cut back, if you’re always looking at the short-term.
Each type of business requires a different amount of working capital. For instance, someone in retail would need a much higher working capital than someone in the service based industry, such as marketing. Business season also plays a factor in the amount of working capital your business needs. Growing up in a beach town, I experienced firsthand that most businesses required no working capital in the winter because everything was closed, but in the summer months they needed an incredibly high amount of working capital.
Take into account your operating cycle as well. Do you hand-make your product? If so, your operating cycle may be longer than someone who provides digital products. By having a longer operating cycle, your business will need more cash available to cover expenses.
Finally, consider the goals you have. Is your business in a position where it is ready to expand? If so, you need more working capital available in order to buy more inventory, hire new employees, expand the physical location, or whatever expansion you may be looking for.
When thinking about how much working capital your business needs, it is important to look toward the future so your business can continue to thrive and grow. By only looking at the immediate future you are keeping your business is the same place. No one wants their business to be stagnant.
If working capital is something your business is in need of, let us help you. Growth and success start now.