What us working capital and why is it important?
Working capital is the key determinant of the health of your company or business. Basically, it is the sum of your current assets minus all the liabilities. It can reflect the available money that your business has each day that is not tied up to any cost of business. Working capital has the ability to show whether your company can meet all your short term debts, supplier invoices and salaries when they are due.
A positive working capital is a good indication that your company is doing great financially. It also means that once the liabilities are subtracted from the assets, there is a high profit degree. A negative working capital is a sign that the processes in your business or company are not working well enough. Issues such a customer debts and slow sales can cause a negative working capital.
How much working capital do you need?
The working capital needs are different depending on the businesses. Mostly, the capital needs are unique to each company. Businesses like retail companies will need a greatest working capital. The retail companies stock up their money until all their stocks are out of the shelf and this can take quite some time, a work capital strategy will help you manage such funds while sales are in progress. Smaller companies and businesses have a harder time raising some finances so if your business is small, a working capital programme will come in handy.
Working capital and stocks
Most people are familiar with the correlation between working capital and stock. Slow selling stock or large amounts of useless stocks can impact how much your business or company produces in working capital. the more or longer your working capital is related and tied to an old stock or customer services that remain unpaid, the less investment money you will have for the business. Old customers’ debts and stock tied to your working capital can impact your business negatively. It will lose the ability t sustain itself.
Unpaid invoices will be a barrier to development in your company. They can affect your ability to raise any form of finances and also the negotiation terms with new suppliers or suppliers of old stock. Without finances or new stocks in your company, your business may suffer largely and consequently your working capital will lower.
Working capital and overtrading
Some companies over-trade with an aim to increase the working capital. Overtrading typically happens when you make purchases or commitments without having any sales or finances to pay for or when you promise your customers more than you are able to deliver to them. This will have a serious effect on the working capital of the company or business. The existing finances are consumed by the stock and services and therefore the liabilities become larger than the assets. This way, the company and business could have a hard time clearing invoices and bills of the workers within the company.
The main advantage of using a work capital strategy is that you will have more flexibility to satisfy your customer’s needs and invest in new products all while expanding your business and services.