It is not an exaggeration to say that working capital management is one of the most important aspects of any business. If a company has insufficient working capital, it runs the risk of being forced into bankruptcy or unable to grow. Yet if it has too much, it can be seen as a sign of weakness and lose customers looking for companies with more liquidity. It’s no easy task managing these tricky balances, but there are steps you can take to make sure your company stays healthy and prosperous. Here is why Why it is Called Working Capital.
Cover Unexpected Costs
Many people use their working capital for day-to-day operations. They will use their account to order a new shipment of parts, buy a new machine, or hire extra employees if needed. But this isn’t the only reason you might need to dip into your account. If you are running a seasonal business, like an ice cream shop, you might need to make last-minute purchases or pay overtime if droughts hit the area and fewer customers come out in the hot weather. These unexpected costs are the most likely to occur, so you should ensure they are accounted for in your budget.
Invest in New Projects
Another reason to keep a healthy amount of working capital is to use it for a new project or for capital investments that could be profitable down the road. You might want to buy a new piece of equipment, pay for renovations at your office, or buy or hire more employees. Even if the project doesn’t succeed immediately, you need to make sure you have enough money in the reserve to keep the doors open until it does. It would help if you had a contingency plan for these situations.
Pay Off Debts
Not all debts are bad. A mortgage or business loan can be suitable for your long-term savings if it allows you to buy something that will give your company a boost in the future. However, some of your debts are probably for bad purchases or to cover overspending. To avoid costly interest payments, you must pay those off as soon as possible. If your company is spending too much, set a budget limiting how much you can pay using credit, and stick to it!
Build Up a Buffer for Emergencies
Finally, a successful working capital management plan should include an emergency fund. An unnatural disaster such as a hurricane or a terrorist attack can shut down all normal business functions. Your employees will need to be compensated for lost wages and overtime when that happens. This can be expensive if the money is unavailable, so it’s wise to have an emergency fund if these problems arise.
Work out a budget for each year and work to stay within it. Consider ways to spend less or make more money by growing your business, and include these plans in your working capital management process. Also, if you have a large debt, consider paying it off as soon as possible. If you save up enough cash, use this reserve to manage your company’s working capital more effectively.
If your working capital is stolen, it is gone for good. However, if you have an emergency fund, you can use that money to pay employees during a crisis and keep the company alive until you can save up enough cash again. Consider saving some of your wages or profits in an account that requires two signatures from two different people to access funds. This way, even if one person steals the money, you will still have another person who can take their place and keep the business running smoothly.
The Cost of Wasting Cash
Do you pay in cash or by check? If you pay in money, someone else must deposit it for you and put it through the system. This process will probably cost a few dollars, and it’s also an inconvenience for your employees if they waste time and gas going to the bank. However, some people use checks and other forms of payment that can carry their own fees, so be sure to compare shops before deciding what is best for your company.
A working capital management plan can help you achieve your financial goals and keep your company profitable. By paying attention to and managing these issues, you will be able to boost the long-term growth of your business.