Working capital is an absolute necessity when it comes to running a business regardless of whether it is small or big. The working capital that a business would need is dependent on various factors such as the plans of the company, the size of the enterprise, and its operating cycle.
Large businesses can make do with negative working capital at times as they are more than capable of creating large funding at any given point in time. Small businesses on the other hand need always working capital to sustain the functioning of their business.
Cash flow is an absolute need for a small business to function. We all know that the shortage of working capital can lead to the shutting down of a business. It’s also important to note that excess working capital is not a boon either. When companies find themselves in a position where they don’t have sufficient working capital, they must opt for working capital loans which are being offered by vendors in the market.
Businesses who are sitting on a pile of spare cash can make use of it in areas that would give them better returns and hence it’s important to manage the working capital if you wish to have a successful business.
factors to account for while assessing working capital for small businesses:
- Type of business:
The type of the business plays a huge role while deciding how much working capital an enterprise would need. Businesses that are involved with physical inventories tend to require high working capital compared to other businesses. Some businesses are seasonal and hence when the season arrives, they need high amounts of working capital at once. Businesses must prepare themselves according to the needs of the working capital which is required at a time.
- Operating cycle:
Some businesses need long periods to finish the product that they are offering. The operating cycle plays a huge role in determining how much working capital they would ideally need in a working year.
When companies take a long time to process and finish their product their operational cost also increases as with time additional costs add up. Companies that are involved in producing goods that take a small period to get produced often don’t feel the need to have a large amount of cash in hand.
- Future goals:
What are the goals and aspirations of an enterprise are also another key factor that has a big say in how much working capital a business would need? If the company has plans of expanding, it would need instant surges of cash revenue to meet the needs of the expansion project. In the same way, if a company is opting to refine their product, they would have to purchase new equipment and better machinery. To achieve the goals set by an enterprise it needs working capital to turn the dream into reality.
- Additional factors:
Many unforeseen circumstances could happen. Such as the Russia-Ukraine war which caused the stock market to crash or the covid pandemic which made it impossible to run a business. One needs to be always prepared to survive through these hardships and the way to sustain yourself is to have enough working capital.
Working capital can be considered the lifeline of a business, you need it for the daily sustainability of your company and for the plans too. Many companies which struggle to raise enough funding opt to go for working capital loans which are very convenient.