Working capital is the lifeline of any business. Working capital is used to purchase inventory, pay short-term debt and day-to-day operating expenses. Without adequate working capital, a business can find itself in financial difficulty. In this blog, we will discuss what working capital is and how to use it well to grow your business.
Working capital is the difference between a business’s current assets and current liabilities. Current assets, such as cash, accounts receivable, and inventory, can be converted into cash within one year. Current liabilities, such as accounts payable and short-term debt, are due within one year.
A positive working capital balance means a business has more current assets than current liabilities. This indicates that the business has enough cash to meet its short-term obligations. A negative working capital balance means a business has more current liabilities than current assets. This indicates that the business may have difficulty meeting its short-term obligations.
Working capital is essential for many reasons:
A business with a negative working capital balance for an extended period may be at risk of bankruptcy.
There are several ways to use your working capital. Here are our top tips:
1. Expand into new markets:
Expanding your business into new markets is a smart way to make more money. It allows you to sell to new customers and grow your business. This brings in extra money, which is good for your business’s financial health. However, before you jump into a new market, you must research. You must find out if people in that market want your products or services. It’s also important to understand what customers in that market like and need.
With excellent cash flow, you can easily expand your business to new markets. Working capital can help you cover market research costs, build relationships with new suppliers and distributors, and marketing and advertising campaigns. This is important for generating awareness of your brand in new markets. It can also help you cover the costs of setting up a new office or warehouse in a new market, training new employees to sell your products or services in a new market, and shipping your products or services to new markets. Having enough working capital can increase your chances of success when you expand into new markets.
2. Increase your inventory:
A bigger inventory can lead to more sales and revenue but also requires more upfront investment. You need to buy inventory before you can sell it, which means increasing your expenses before you see an increase in income. You may also need to pay for more storage space. If your customers don’t pay on time or your profit margin is too low, you may not have enough working capital to cover the increased order size.
A working capital advance can help you grow your business inventory size so that you can grow your sales and profits. A working capital advance is a short-term loan that can be used to finance inventory purchases. This can help you increase your inventory levels without tying up your cash.
3. Add more team members:
Hiring new employees can be a great way to grow your business, but knowing the costs is essential. You’ll need to pay a salary and benefits from day one, and it can also be expensive to find the right person for the job. Additionally, it takes time for a new employee to become fully productive, so you may not see a return on your investment right away.
If your business is growing fast, you might need that extra pair of hands, but all your working capital is tied up in your existing business needs. In this case, you can consider a working capital loan to finance your new hire.
A working capital loan is a short-term loan that can be used to cover the costs of hiring a new employee, such as salary, benefits, and recruiting expenses. This can help you get the new employee you need without having to tie up your own cash.
4. Manage cash flow gaps:
Cash flow problems can hurt a business. They can stop a business from ordering inventory, paying employees, and covering other expenses. All these influence the business’s performance, making them very important to address.
The first thing to address in these challenges is to determine their reasons. Cash flow problems can be due to several factors, including late customer/client payments, overpaying vendors, ordering too much inventory, and constant charges for equipment maintenance. It is best to determine which of the mentioned problems produces cash flow challenges.
Working capital can be used to help cover the gap between income and expenses while you are fixing the underlying problem.
If you’re experiencing a problem with delayed international payments, you should choose a payment platform that offers quick transfers. Winvesta offers this very solution with its global collections accounts. Receive your money in as little as 1 day and withdraw to INR at rates starting at $3 + 0.99%.
Working capital is essential for any business. It allows a business to meet its short-term obligations, take advantage of opportunities, and protect itself from financial difficulties. Several ways to improve your working capital include expanding into new markets, increasing your inventory, adding more team members, and managing cash flow gaps. Following these tips can improve your business’s financial health and ensure its long-term success. And if you’re looking for a specific way to improve your working capital, consider using Winvesta’s virtual multi-currency accounts.
Open your Winvesta account today!