Working capital is the money that’s often used to pay everyday expenses and is measured by subtracting your current liabilities from your current assets. Here are a couple of the most common ways to use it to increase the success of your business.
Proceed With Normal Operations
Cash primarily comes in one way (through your customers) and then leaves your business in many different directions. You have to pay your employees, your lenders, the landlord you rent your office space from and your accountant or bookkeeper – just to name a few examples. You’ll no doubt want to pay all of these people and entities without any delays or hiccups so no one’s on your back at the end of the day. Plus, vendors sometimes offer discounts or incentives for early payments and you’ll certainly want to take advantage of them when possible. And of course, it’s always good to have a monetary “cushion” so that you don’t have to worry about barely making it, even when your business faces slower months or seasons during the year. Considering all of these factors helps to keep things running smoothly and efficiently. Paying for your daily expenses and operations is one of the primary uses of working capital and why it’s so important.
Be Prepared for What’s Coming
Companies get into all kinds of unexpected situations the longer they’re in business. You, as the owner, must think ahead and prepare for hard hits, economic downturns, losses in market, etc. They may come without warning and in that case, you don’t want to be left without a recourse. Having a bit of money saved up will give you some peace-of-mind in those times of trouble. On the upside, positive opportunities can also come to your company in all different forms: You might see a new product or service you could add to attract more customers or a worthwhile project in which to invest. There may come a time when you have the option to expand into a new location or purchase some innovative technology or equipment which will increase the quantity and/or quality of your production potential. Of course, each of these things require money and again, that’s when it’s necessary to have some extra funds on hand.
When you prioritize having enough working capital for your business, you’re ensuring that things run smoothly today – and you’re also laying up some financial security for the future. In this way, you’re preparing for both the short-term and long-term success of your company.