By Mark Hildred, Managing Partner
Working capital is often seen as a sign that a business is doing well.
This is not inaccurate, but it is far from the whole truth.
As the global economic situation becomes increasingly complex, it is best to understand how to manage working capital and whether it is a help or a hindrance.
What is working capital?
Working capital is the amount of money that a business has once the current liabilities are removed from the current assets.
Assets will typically include the inventory of a business, but can also include things like accounts receivable and unpaid customer bills.
On the other hand, liabilities are accounts payable and any debts that your business has outstanding.
The amount of working capital a business has is a direct measure of financial dynamism, but it is possible to have too much of a good thing in this instance.
Why would too much working capital be a bad thing?
Having working capital shows that you are able to manage your liabilities effectively and have a good handle on generating assets.
Keeping some working capital to one side lets you brace for economic hardship and it can act as a buffer if your cash flow drops and the liabilities begin to eat away at your assets.
However, money that is just sitting around is seldom a good thing to have.
Instead, working capital is the key to business growth as it can be invested into the business to pave the way for greater opportunities.
It is vital that this is done effectively, as good investments lead to businesses blossoming while bad investments can leave you high and dry.
If you are seeking support from external investors, the amount of working capital you have will determine how much money they are willing to invest.
Have too little and it may be considered that your business is struggling, while having too much shows that you lack confidence in your business.
If you are not ready to invest money into your company, then why would you expect anyone else to take that risk?
As such, managing working capital is one of the great tightrope walks of business ownership and should be managed in tandem with professional financial advice.
Our team can help you manage your budgets effectively so that you can better leverage your working capital.
Rather than letting it become a burden, your working capital can pave the way to growth and future success.
Speak to our team today to find out how to effectively manage your working capital.