How Much Working Capital Does Your Small Business Need?

Posted by Anuj Pandey on January 29th, 2018

Working capital may be a difficult concept for the small business owners to understand. Ideally, working capital is the difference between your current business assets and your current business liabilities. Your current assets may include the liquid cash available or cash equivalents like savings account, market securities such as bonds and equity, inventory etc.

On the other hand, your current liabilities are the debts and obligations like supplier bills, short-term debts, rent, utilities and taxes.

The working capital of your business is a reflection of its operational efficiency. If your business has more liabilities than assets, its working capital goes in negative which means it will have difficult time in meeting its operational stipulations. If your finances can’t keep the business progression afloat, turning the venture into a profitable one might be difficult.

There are several ways to obtain financing for your business to manage your working capital like short term and long term working capital finance by Non-Banking Financial Corporations  with affordable interest rates and flexible prepay options. However, you need to determine the working capital for your business before applying for a loan. You need to ponder upon three basic factors to determine your working capital.

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.