Everything You Need to Know About Working Capital

Working capital is very important for the growth of any business, whether you are looking to expand, take in new projects, or remain afloat tough economic times. Working capital will support the running costs of your business and can help you outgrow your competition. Roof repair Fredericksburg and other businesses have been able to realize growth fast as a result of having a good working capital.

What is working capital

Working capital simply refers to the money you have at hand. It can be savings from your profits, a bank loan, or other means of raising capital. You use this capital to fund your day to day operations and cover all expenses. To calculate your working capital, you need to subtract your current liabilities from current assets. Current assets are cash and assets that you can convert into cash within a year. These assets may comprise of accounts receivable. inventory as well as short term investments.

When it comes to current liabilities, these are short term debts or accounts you need to settle within a year. They include accounts payable, sales tax, overdraft, wages, and payroll expenses. You should always aim to have more current assets than liabilities and have positive working capital. In case your current assets do not exceed your current liabilities, you will be faced with a deficit that could cause you problems paying a debt.

When you need working capital

There are two main scenarios to explain when you need working capital. To keep your business afloat when there is less money coming in. It can be due to economic slowdown or when you are involved with seasonal businesses. You also need working capital to fund the growth of your business such as expansion or opening new branches. You may be starting a large project in which you can only get paid upon completion.

There are a couple of strategies you can use to get working capital.

Speed up the collection process

Working capital shortages normally happen due to delays in receiving payments from clients. The delays will lengthen your working capital cycle making it take a longer time to convert your current assets and liabilities into cash.  You need to track collection time with clients to make it easy to know which clients are slow payers. You can also renegotiate payment terms with existing clients so that they can pay sooner. You can also invest in invoicing tools to help you get paid faster.

Request for upfront deposits

There is nothing more frustrating than a project coming to an alt due to a shortage of cash. Asking for an upfront deposit will give you some working capital to cover for the costs of your project. Deposits will also minimize the chances of non-payment. While deposits will give you extra cash, charging deposits is not always the best option. You may charge a deposit on a client during the first interaction, but waive it as you continue to trust the client.

You can also consider peer to peer lending and getting loans from financial institutions to bolster your working capital.