You will be in need of more working capital as your business grows. This is the money your business needs to function. If you do not have enough, your business will certainly fail. Today, many businesses are forced to shut down since they are not capable of paying off their short term debts if they are due already. It is for this reason that it is very crucial for you to employ efficient working capital management strategies.
Most businesses apply for a loan in order to finance their growth. Be aware that financial institutions will decide if you are eligible for the loan you are applying for based on the credit worthiness of your business.
Credit Worthiness – What Is It?
This is determined by 2 main factors – the existence and extent of your collateral, and the liquidity of your business. These are reflected on your balance sheet. To determine the working capital of your business, get the different between your assets and your liabilities. Creditors will look into this difference along with your working capital for them to get an idea of how capable you are in paying your bills.
Your working capital is your investment in current assets – these include cash, inventory, marketable securities, and accounts receivable. On the other hand, your current liabilities are your accrued expenses, your near-term portion of loan due, and your accounts payable. Your net working capital is the difference between your current assets and your current liabilities. The term “current” will mean that they must be liquidated within the period of one business cycle, which is usually a year.
The Importance Of Working Capital Management
Proper management of your working capital is very important for the success and growth of your business. This will involve the decision you will make when it comes to working capital and short-term financing. Also, this is all about managing the relationship between your short term assets and liabilities. Its main aim is to make sure that you are capable of continuing your business operations with sufficient cash flow in order to meet your upcoming expenses.
Efficient working capital management is characterized by your ability to convert your assets into cash, which you will use to pay off your bills. “Liquidity” is the term used to describe the ease with which you can do this. It is greatly influenced by the rate at which your accounts receivable and inventory can be transformed into outright cash. Be aware that a higher ratio of assets to liabilities will mean better liquidity.
Financial specialists at HSBC highly emphasized that without excellent working capital management, your business is sure to fail, regardless of how much money is started out with.