While it might sound like an exciting thing to have a high working capital, there can be some unforeseen negative consequences that come with it.
Simultaneously, low working capital is also not good and can severely restrict your operational capacity.
It is worth understanding what exactly working capital is and why you need to determine the exact right amount to ensure your business can operate effectively.
What is working capital?
Working capital is the difference between a company’s current assets and its current liabilities.
Your company’s assets include the things you would typically expect, such as cash and your inventory, but also include accounts receivable and customers’ unpaid bills.
Your liabilities will include accounts payable and any debts that you have outstanding.
The resulting figure shows the liquidity and short-term financial health of your business and is a good indicator of what financial resources are currently at your disposal.
What does positive and negative working capital mean?
Having a negative working capital is a potential cause for concern.
If your working capital is negative, then it means your current assets do not cover your current liabilities.
Some business types can endure a negative working capital, but having negative working capital for a prolonged period of time is problematic, as you will be unable to keep up with changing financial pressures.
Working to mitigate negative working capital is imperative for the long-term future of your business.
Yet, as tempting as it might be to accumulate a high working capital, this is similarly unwise.
Having a good working capital will allow your business to dynamically adjust to emergent financial situations.
In the current times of economic turbulence, having some funds to hand to cope with sudden shifts in the market can be essential to your business’s survival.
However, if you have plans to attract more investments, having a high working capital may be a detriment.
Investors want their money to grow, and having a working capital that is too high may suggest an unwillingness to invest on your part.
You need to evidence your desire to grow your business, so using your working capital to explore new ventures and opportunities can lead to greater investment and growth in the long term.
Your business acumen has got you this far, and you do not want to be seen resting on your laurels now.
Keep your working capital to an amount that will allow you to navigate financial challenges, but do not be afraid to invest when needed.
Don’t miss out on vital investment opportunities. Speak to our team today to manage your working capital.