Top 5 Ways To Expand Your Business With Quick Working Capital In 2022
Working capital refers to the difference between a company’s current assets (such as accounts receivable, cash etc.) and current liabilities (such as accounts payable, debt etc.). It is a financial metric that helps evaluate the efficiency of a business and its short-term financial health.
Positive working capital means a company has more current assets than current liabilities. It is in this stage a company can instantly pay off its short-term liabilities showing its financial strength and ability to expand further. On the other hand, negative working capital refers to the ratio of a current asset to liabilities when it reaches less than 1.
Businesspersons can improve/increase working capital by following certain techniques, such as shortening operating cycles, optimising supplier payments, ensuring faster customer collection etc. Managing business working capital properly can help it grow as well as expand. Wondering how? Let’s find out!
Ways Working Capital Can Help Expand Your Business
Improving Cash Flow
Both established businesses and startups experience favourable and unfavourable circumstances at some point in time. To survive and grow in these circumstances, every business must optimise working capital. Suppose a business can maintain a steady cash flow and an optimum working capital. In that case, it can easily meet day-to-day operations and finances, such as purchasing raw materials, paying salaries to employees, and other activities.
Further, business persons can reinvest the surplus cash in accelerating business growth. Working capital management helps startups ensure steady access to cash, improve cash flow and invest excess money for business growth and expansion.
If a company can efficiently manage liquidity (cover both daily operations and unexpected costs), accounts payable, i.e., avoid early or late payment and have a standard level of commercial debt, its creditworthiness will increase.
A decent credit rating will help a business, be it a startup or an established one, attract more financers and improve financial terms as there will be less risk of credit default. If a company can use working capital financing properly, it can positively reflect its organisational ability to manage business operations.
Managing Seasonal Operations
Primarily, there are two types of businesses, e.g., involved in active operations throughout the year and another that focuses on seasonal operations. For the latter variant, the demand for working capital multiplies at a particular time rises as these organisations need to complete production within a short period of time and make it ready for the market.
Here, most businesses worry about a shortage in working capital, which can prevent them from taking larger orders and competing in the market. These decisions restrict growth as well as business expansion. However, proper working capital management can help bridge this gap and utilise the opportunity at hand. Thus, by efficiently managing a business working capital, organisations that depend on seasonal operations can get the chance to flourish and expand their businesses slowly.
Firms may adopt policies, such as cash discounts, easy monthly instalments (EMIs), extended credit periods and offer the same to customers. All these offers have advantages as well as disadvantages (in terms of increased interest costs).
However, if organisations/firms adopt a balanced working capital management policy for these schemes, it will help lower interest costs thus increase profitability.
Ensuring Uninterrupted Production
Paying vendors and creditors on time is crucial to running a business smoothly. If companies do not pay them on time, they might stop supplying goods which can affect production thus business operation. If these things continue for a longer period, it can negatively affect growth and expansion.
However, suppose an organisation has enough cash flow and balanced working capital (as a result of proper working capital management). In that case, it can pay vendors and creditors on time and ensure a steady supply of raw materials, thus uninterrupted production.
A balanced working capital level ensures all of the above-mentioned operations and internal workings of a business which ultimately helps it expand.
In addition, from the above, individuals can learn that working capital refers to the difference between current assets and current liabilities. One of the effective ways of managing it is to invoice debtors and collect payment from them, which is essential for paying liabilities. If organisations/firms do not get an on-time collection of funds, they cannot run business operations smoothly.
In such cases, instead of waiting for their debtors to pay, they can opt for invoice discounting, unlock cash stuck in unpaid invoices and get instant cash to continue business operations.
Wondering where to find such companies? Leading cash flow solution providers like KredX offer Invoice Discounting where eligible businesses can pledge unpaid invoices and get instant cash.
Any entity willing to expand its operations must maintain a balanced business working capital. This will help the entity to purchase raw material, make and sell finished goods, pay wages to employees to ensure uninterrupted production and continue the cycle. With enough cash flow, adequate working capital and proper working capital management, thus businesses can grow and expand.