4 Facts about Working Capital
Capital is required to fund the day-to-day functioning of your business. You can gain enough capital to fund your startup or a new project with a loan, but for long-term success, you want to turn a profit and use the excess income for your working capital. Here are four facts about working capital.
1. Why It’s Necessary
Whether your business is small, mid-sized or large, you need working capital. If you don’t turn a profit, you won’t be able to pay for things without applying for loans. Loans won’t work long-term if you don’t start earning more money than you spend. You could end up in progressively more debt and find it more difficult to apply for loans in the future if you can’t pay them back. With enough capital to fund your expenses, you can ensure your business remains steady. With more capital, you can expand.
2. The Necessity of Budgeting and Strategizing
While having capital is the first step, you need to be able to budget and use that capital excessively. Make sure you work your capital into long-term and short-term needs. Organize your budget strategically, making sure expansions have enough time to be successful and provide you with more profit eventually. Allow yourself some wiggle room in your budget in case you run into issues or need to put certain projects on hold and begin others early.
3. Sources of Capital
The traditional source of capital is profit, but that’s not always the best or most accessible option, for example if you’re running a startup or want to expand quickly. For the former, you likely won’t be turning a profit at all yet. For the latter, your plans may exceed your current profit. Luckily, there are various financing options available, such as factoring, small business loans and cash advances. Alternatively, you can utilize a business line of credit.
4. Two Categories
There are two main categories your working capital needs may fall into. These are long-term capital and day-to-day capital. The former includes what you have available to budget for future growth and new projects or product development, as well as rainy day or emergency funds. The latter involves maintaining daily operations, such as employee benefits and paying utilities and facilities bills.
Remember, no matter what type of business you run, you need excess income. Without it, you’ll be unable to perform basic operations, such as paying employees and powering your technology.