Business growth and stability – it’s what every small business owner strives to achieve and it takes capital to reach that goal. Maintaining sufficient working capital is a constant struggle for many small businesses, making it difficult to invest in growth. There are ways a business owner can increase capital as well as a variety of working capital solutions available through alternative finance providers. However, before investing in a growth strategy, it’s important to determine your current level of working capital and how much more you’ll need to fuel business growth.
How Much is Enough?
Working capital is defined as a company’s current assets minus its current liabilities, found on their balance sheet. Cash on hand, accounts receivable, inventory and any short-term company investments will be listed as assets. Accrued expenses such as accounts payable, payroll, short term loans, and interest are listed as liabilities. Positive working capital means you have enough cash or liquid assets to cover all accrued expenses. That doesn’t necessarily mean there is enough capital to kickstart business growth. So how much is enough?
There is a basic formula that can help a business owner figure out their current level of working capital and where they need to be to start investing in growth. The first step is to determine the company’s current ratio which is their current assets divided by current liabilities. A ratio less than one means the company’s liabilities are costing them more than they are making. A ratio of more than 2 is considered the target ratio, indicating that your current assets are at least twice your current liabilities providing positive working capital. This ratio can vary by industry.
Exactly how much capital is needed for growth depends on the target ratio and how quickly you want that growth to happen. There are online working capital calculators such as SurePayroll that can help you figure that out.
Improving Working Capital
There are internal working capital solutions that can help increase profits, build capital and fund growth. Start by taking a long hard look at your liabilities and see where you can reduce expenses. Review your payroll. Are you paying for employees to work overtime? It may be more cost-effective to hire temporary or part-time staff rather than pay the higher overtime hourly rate. Another way to reduce expenses is to refinance debt to get a lower interest rate or smaller payments. This can be done with high-interest rate credit cards or bank lines of credit.
Closely monitor your inventory levels to make sure you aren’t keeping more on hand that you need. The value of inventory can fluctuate over time, potentially leaving it worth less than what it costs. Find a supplier that can provide you with inventory quickly when you need it, allowing you to sell it and increase your profits while reducing your expenses.
Don’t overlook the value of assets that you’re no longer using. Equipment that has become obsolete for your company can be sold. Other businesses may be able to use it or in some cases, the materials or components that make up the equipment may be valuable such as scrap metal. Selling such equipment will increase your working capital.
Consider re-evaluating supplier contracts and see if you can negotiate with them to get lower prices. If they won’t budge, you can look for alternative suppliers who offer similar products at better prices. All of these methods can help improve your working capital.
Working Capital Solutions with CapFlow Funding Group
Have you reduced liabilities on your balance sheet, converted unused assets into cash and creating positive working capital but still need a little more capital to grow your business? CapFlow Funding Group offers working capital solutions to provide the funding you need to grow your business. We work with business owners across various industries to find the best working capital solutions to their businesses on track. Our team will work tirelessly to see you through to success. Contact us today!
