The Operational Cycle
The working cycle of your business evaluates how quickly your current assets can be turned into cash and earn profits after clearing your liabilities. Companies that take more time to market and sell their product requires more working capital than with those having short working cycle. Analyze your income statement and balance sheet to observe your ‘turnover rates’ and determine your working cycle.
Most of the small business require short-term working capital finance in some unspecified time during the working cycle to cover up the expenses before the revenues are generated.
Type of Business
Certain types of businesses require high working capital than others. Business with more physical inventory may require high working capital to purchase raw materials for the business. On the other hand, businesses which deals in services rather than physical products like consultancy firms require lower working capital.
Also, many businesses are seasonal in nature, which means they require high working capital for short term duration during certain time of the year. Based on the type of business you are running, you can predict the most profitable months and times when business will be slow. You may need a short term working capital loan during the peak months of business to manage these financial conventions.
Management Goals of the Business
Your business goals are another important factor that determines the amount of working capital required for your small business. If your business is relatively new and you are looking to expand your business to higher levels, you will require more working capital. On the other hand, if you are not looking to expand your business and want to maintain the current status and flow, you may require less working capital. It would be in your and your company’s favor if you chose to expand your business and grow. That is because doing limited business would affect your market presence negatively, and if there are your competitors then you should be on your toes to expand your business. Otherwise the odds are not in your favor. They will gain market share and the name of your company will lose its popularity.
You can expand your business by placing yourself ahead of others. For that you need to do considerable market research, design and development of your product. The cost of market research, design and development to expand your business can be considerable. Short term and long term working capital loan can help you bridge the gap.