5 Common Myths About Working Capital

What Is Working Capital?

Working capital is the capital that a business uses in its day-to-day operations. It’s calculated as the current assets minus the current liabilities. Examples of current assets would be unpaid customer invoices, cash, and inventory while examples of current liabilities would be payroll, short-term debt, and accounts payable. Calculating your working capital is an easy way to determine your business’s financial health.

Here are 5 common myths about working capital:

Myth 1: Only Businesses Who Are in Dire Need of Cash Benefit from Working Capital

All business should have working capital on hand, not just those who are strapped for cash. Having available capital allows you to seize a lucrative business opportunity, make a strategic investment, or act quickly to resolve an emergency. 

Myth 2: Working Capital Loans Harm Your Credit

Taking a working capital loan actually gives you the opportunity to boost your credit. By showing you are able to responsibly secure financing and repay the debt in a timely manner, you’ll strengthen your creditworthiness.  

Myth 3: Working Capital Only Helps Your Business Short-Term

Not only does taking a working capital loan give you extra cash to have on hand, but it also gives you the opportunity fuel the long-term growth and success of your busines. Remember, you can’t make money without money.

Myth 4: Applying for Working Capital is the Same as Applying for a Loan from a Bank

The application process for a traditional bank loan is long and arduous. On the contrary, applying for a working capital loan with an alternative lender like SBG Funding offers less regulations, less paperwork, and much more flexibility.

Myth 5: Working Capital Isn’t A Priority

Nothing could be farther from the truth! Maintaining a positive cash flow is crucial for the success of your business and for maintaining the confidence of employees, shareholders, and vendors. If you aren’t able to pay your staff, purchase inventory, or pay your vendors, your company’s operations will suffer instantly.

How to Effectively Manage Working Capital

Continually monitor your business’s financial health to make sure that you’re able to meet your short-term obligations and that you’re on track for the long-term ones. If your company has negative working capital and is struggling to make payroll or pay bills, you’ll need to examine your day-to-day operations and cash flow. Maybe you overordered inventory or your company is having a difficult time collecting on accounts receivable. By taking a deeper look into your business’s finances, you can get a clearer picture. Here are a few tips to help you:

• Evaluate your inventory to see if you are managing it properly.
• Think about reconsidering your payment terms. If you offer Net60 and you are struggling to stay afloat, you may want to consider shortening your terms to a Net45 or Net30.
• For businesses who have a lot of outstanding invoices, invoice factoring can help. You’ll spend less time on collecting and more time on producing.
• Consider liquidating any assets that you no longer need in the immediate future.
• Create a working capital strategy with cash flow forecasts that can predict your balances, accounts receivable, and accounts payable.

Final Thoughts

Working capital is the key to any successful business, no matter how big or small. Nobody wants the cash flow problems that unpaid invoices can cause or to miss out on an amazing opportunity for lack of capital.

For more information about how we can help you secure working capital for your business, email us at info@sbgfunding.com or send us a message here.