How much working capital does a small business need?
How much working capital or working capital does a small business need? Hardly a business that is established and fully functioning does not need money – there is no doubt about that. Having money and financial resources allows a company or micro-entrepreneur to buy equipment and supplies, and can advertise their business by financing the marketing campaigns and paying the employees’ payroll.
How much working capital does a company need?
No one escapes this stage, solving how much working capital or how much money commercial lines of credit will be needed at a particular point in the life of the company. Every business has its own unique needs, so no financial solution or requirement is the same for two companies, even if they are from the same segment or branch. To determine what your business really needs to keep everything thriving, consider three factors:
1 – The operational cycle.
2 – The type of business that is inserted.
3 – Your business goals.
How the Operating Cycle Affects Working Capital
Its operating cycle can be determined by examining its accounts receivable, accounts payable and inventory, considering how long it will take to ex:
- How many days will it take to receive an account?
- How many days does the stock take to convert into cash or an account receivable.
- How many days is required to pay a duplicate.
In a perfect world, its operating cycle always pours enough money to pay the bills and still have left over for investments. However, typical businesses do not run in a perfect world. Most business owners need funds to cover their expenses before revenues go into the box. Working capital financing needs depend on the structure of the business.
Working capital depending on the business model
Depending on the business model of the company, one may require a large amount of money to compose working capital. You may also need to increase inventory at certain times of the year. For example, a retailer should have a good inventory particularly during October, November and December to prepare for the holiday and holiday season.
On the other hand, some companies can thrive with low working capital, such as financial advisors, coaches and online trainers who sell their products by stock but as they look for their times and advice. Therefore, they do not have any kind of need to keep stock of time or advice therefore do not require working capital for that purpose.
Which business objectives affect the value of working capital
What do you expect from your business next year? And for the next five years? Your business goals are important in determining your needs to obtain or finance working capital to keep the business running and growing, even slowly. Some goals you may have include:
- Keep your business growing.
- Expand your reach to more regions.
- Increase product and service offerings.
For all this it costs money (not to mention time and a lot of hard work). If you aspire to achieve any of these goals, you will need to increase your working capital .
Also, if you are just starting your business, you will need more working capital than the money you will make in the next few years until you are established or have reached a level where you feel more comfortable financially.
What working capital needs
Many entrepreneurs and individual entrepreneurs find that their working capital needs are not compatible with their business cycles, business structures or commercial ambitions. It is now common for business owners to take on short-term debt through resources such as alternative financing to close the lack of money in the company’s capital.
We know that small and medium-sized businesses are as unique as the people who run them. Your needs and how much working capital you need will never be exactly the same as those of other companies.
However, the important thing is to determine what these needs are precisely and make the right moves when it comes to defining how much working capital the company needs.