What Is Working Capital?

A company’s working capital is a simple measure of the efficiency of its daily operations. It is determined by deducting a business’s Current Liabilities from its Current Assets. When a business is said to have a positive working capital, it means that the business is in a sound financial position, and well able to pay its debts.  

Working capital loans are loans utilized for the funding of daily business operations on a short-term basis. While these loans are not intended for acquisition of long-term assets or investments, they can ease the handling of day-to-day expenses. Routine operational costs of a business may vary across industries, but in general, they are divided into fixed and variable costs.

Fixed costs include expenses such as rent or employee wages while utilities (electricity, water, production costs, etc.) are covered under variable costs. Marketing and advertising procedures require capital, and there is a need to engage in these activities to boost the image of your products or services so more people can know more about your business. You may also use them towards inventory purchase.

Why Working Capital Matters

With rising inflation rates and a competitive economy, some businesses are unable to generate the revenue required to fund their daily operations. As a result, business owners are often stressed out overstretching their funds to cover their operations of activities while supporting other aspects of their business.

A working capital loan can help tide you over until your business gains a firm foothold and you can meet your day-to-day operational expenses. This can give you some much-needed breathing space during which you can continue business operations despite an inability to cover related operational costs.

A significant cash infusion can make a huge difference to business performance. Access to capital can improve your business production capability and improve your sales drastically

When Do You Need a Working Capital Loan?

There are several reasons why you may need a working capital loan. You can utilize a working capital loan funds for projects such as starting, expanding or reorganization of your business as well as daily operational costs and debt payment.

Businesses whose revenue are cyclical or seasonal usually require higher working capital to stay above the waters during their off-peak periods. For instance, a company may make more significant transactions during holidays, churning in remarkable profit at the close of the year’s business calendar. However, the business must reserve enough funds to finance the purchase of inventory as well as the payment of workers’ salary when the tables turn.

For example, a ski equipment rental company may require external financing to keep them operational during summer months.

Effective Management of Working Capital

Managing your working capital is a critical step to any businesses success and there are many things in daily operations that can affect your working capital. Some examples include; overstocking or under stocking and recruiting too many workers or inadequate supervision of employees may also result in losses. Business owners must give a holistic view to the efficient management of working capital, to ensure the swift running of its operations. Here are some vital tips to help business owners manage their working capital.

Know Your Day to Day Costs

To effectively control your cash flow, you should know and understand your daily expenditures and establish a limit for your working capital. Day-to-day evaluation of your account balance, outstanding payments and invoices, as well as your general financial status, will go a long way in the management of your business’s working capital.

Move Your Inventory

Use your working capital to finance cash flow opportunities. Improving your inventory sell rate can, in turn, boost your cash flow. Get your customers to buy more of your products by offering discounts or incentives on bulk purchases for example.  Remember, that your buyers will order more if an extra purchase helps them save more; and a promotional offer or a phone call can make all the difference in your quest to boost capital.

 Adopt Prompt Payment Policy

Create and strictly adhere to a policy for timely payments. This system should not be compromised at any point; it will send a stern message to your customers that you do not tolerate delayed payments. Your customers will learn to comply with your pay-quick policy and rather delay other creditors who do not operate a strict policy like yours.

Balance Stocking; Avoid Overstocking

With working capital loans, you can increase your stocks, reducing the cost, per unit, of goods bought. Calculating the maximum efficiency levels requires a deep assessment of customer behavior as well as previous sales analysis. Record inventory status, study natural or seasonal variations and determine the peak inventory levels with the minimum rate of overstock. In your breakdown, pick out the points that are not instantly apparent.

Having inventories in shelves, sometimes, propels a business owner to employ more proactive measures in selling them off which leads to more productivity. However, overstocking may lead business owners to have unsold inventories. Now, from the failures or successes recorded with the use of proactive approaches on your inventory, you will be better positioned on how well to utilize your working capital.

Employee Supervision

Efficient distribution of Working Capital does not end with inventories; it also affects the management of productivity and labor cost. One big loophole with the management of small businesses is the loose supervision of their employees. Wasting official hours is like having unsold inventories on your shelves. Employees must be spurred to productivity – do not employ additional labor; except the current labor strength cannot meet up with your production needs. Having a daily well-planned and orderly outlined list of duties and tasks before the day’s work will help enhance output – even with your present workforce – downplaying the need to spend more resources on additional workers.

Why Choose SBA-Capital?

SBA-Capital offers SBA loans to business owners nationwide. As a Dallas, Texas based company, our lending team has been providing quality service for our customers since 1982. Our objective is to match your short and long term financial needs to the best SBA loan program available.

The SBA was founded to help the local business person and create jobs in the U.S. The program has exceeded all expectation creating hundreds of thousands of jobs each year and total annual loans typical exceed 30 Billion dollars annually. Our objective at SBA-Capital is to make it possible for our borrowers to select and obtain the best possible loan for their financial and wealth planning.

Please contact Hershel Pierce for a free recommendation on which loans you should consider for your financial planning.