The importance of working capital has its origin in a time when industries had a close relationship with agriculture. The processors bought the autumn harvest, processed it and then sold it to the market as a finished product.
We have all heard the term “working capital”, but what exactly is it? How can you best use it for your small business? The definition of working capital is the number of circular assets of a company minus the current liabilities. However, many small business owners prefer to use their operating cycle to better determine their working capital needs, which is also perfectly acceptable. The operating cycle analyzes the cycles of accounts payable, inventory and accounts receivable in terms of days. Working capital is used for day-to-day operations for the operation of a business. It seems quite direct, yes? It is, then why do so many small business owners avoid taking advantage of it for the best interest of their company? The simple answer is fear. You have worked hard to build your business; you have endured months, maybe even years of hardly generating profits, questioning yourself from one payment period to the next, if you could manage the payroll. But, their hard work and perseverance have paid off; You have money in the bank! It has that cushion necessary for the times of the year in which you can see a decrease in sales or the necessary funds to offer your employees vacation vouchers. Why would you want to spend that? The short answer: to stay competitive. Read more: How to calculate the capital invested
Working capital: Consent Your Treats
Maybe your small business is a bakery. When customers enter your store, they want to consent, which is really an immersion experience. It goes beyond the muffins they are buying; They want a taste for their eyes, as well as for their mouths. As such, maybe it’s time to invest in new shelves to showcase your latest treats or in brightly colored mixers, to give your customers a sense of fun and charm that you are trying to cultivate with their variety of delights. If your team is starting to show signs of wear and tear, the first thought of a client is not going to be, “Wow! It must have been going very well, as their mixers look so worn out. “No, your first thought will probably be more like” Ewww … why can not you buy new equipment? I do not want to eat anything that is made using that machine. “Certainly, it can be tempting to continue with proven and proven and not invest your working capital in new baking equipment, as you want to save money. However, doing so could end up costing you money in the long term. Keep reading http://www.wetakecareofbusiness.net/importance-of-a-business-plan/
Throw a layer of paint
Nobody wants to patronize a business that looks like the Gray Gardens house. Maintaining the appearance of a fresh and updated space is important to please the senses of its customers. Sometimes, that can be as simple as replacing worn decorations or making new posters. Other times, yes, it means a complete renovation, throwing stripped wallpaper or repainting the entire store. While you can resist the initial moment and with the money, you will take, think about how attractive your bakery will be with a fresh and new view. If your only decorating skills are those you use at the top of your cakes, do not refrain from using part of your working capital to hire a professional to help you develop new color schemes.
If you have it, show it
You have worked hard to build your business and you are proud of how much people enjoy their homemade muffins and ice cream. Growing up, they always tell us that nobody likes a braggart, but when it comes to being a successful small business owner, it is perfectly acceptable to have the confidence to show off your products and services. In this era of social media, many small business owners avoid investing their working capital in marketing efforts, and while Facebook and Instagram can be great ways to spread the word, an effective marketing effort will have to include brochures, catalogs, store materials and coupons. This is another area where hiring a professional could produce better results. After all,
Happy Employees, Happy Customers
Have the previously mentioned ways of using working capital served? Is your business now experiencing growing pains? Are your current employees being overworked to keep up with the incoming orders for custom made cakes? Any good business owner knows that we are only as good as the people with whom we surround ourselves and certainly want to keep their current employees at their best and not burn or become disgruntled. Maybe it’s time to use part of that working capital to invest in people and grow your team. Not only will it prevent employees from being overworked (which can create resentments that result in resignations or errors), keeping them happy and more productive.
Grow To Grow
You can have the best-baked goods in three counties, but if your store is small, making your customers feel claustrophobic, stressed or overheated, no one will want to stop and enjoy them. Using your working capital to move into a larger space or increase your current space will ensure that you are able to comfortably serve a larger number of people, resulting in a greater number of clients being served. Remember the movie, Field of Dreams? “If you build it, they will come.”
Money makes the world turn
The above suggestions assume that your small business is not new, and therefore has begun to generate income to have some reserve of working capital. However, what happens if you are still fairly new to your small business, but do you have the need to make some of the improvements mentioned above? What can you do? Here are the five most common sources of short-term working capital:
Capital: If your business is in its first year of operation and has not yet become profitable, then you may have to rely on capital funds for short-term working capital needs. These funds can be injected from your own personal resources or from a family member, a friend or a third investor.
Trade creditors: You may be able to apply for help to provide working capital in the short term. If you have paid on time in the past, a commercial creditor may be willing to extend the terms so you can comply with a large order. For example, if you receive a large order that you can meet, send and pick up within 60 days, you could get 60-day terms from your provider if the 30-day terms are normally given. The commercial creditor will want proof of the order and may want to present a lien on it as collateral, but if you allow it to proceed, it should not be a problem.
Factoring: Once you have filled an order, a factoring company buys your account receivable and then takes care of the collection. This type of financing is more expensive than conventional bank financing but is often used by new companies.
The line of Credit: A line of credit allows you to request funds for short-term needs that may arise. The funds are paid once the accounts receivable resulting from the peak of short-term sales are collected. Lines of credit are usually made for one year at a time and are expected to be paid for 30 to 60 consecutive days at some point during the year to ensure that funds are used for short-term needs only.
Short Term Loan: Although your new business may not qualify for a line of credit from a bank, you may be successful in obtaining a short-term loan (less than one year) to finance your temporary working capital needs. If you have established a good banking relationship with a banker, he or she may be willing to provide a short-term note for an order or for a seasonal inventory and/or accumulation of accounts receivable. Continue reading Net working capital versus operating the working capital
As you see, there are many ways in which your working capital can work for you. Also, there is no reason to stress if your business is not yet in a place to have those funds in place. Continually investing in your company, although it may seem costly at the time, will get great rewards as it continues to grow. It can be said that the importance of working capital is an investment made by the company in assets that can be realized in the short term, such as cash, negotiable securities, accounts receivable and inventories.