Working capital is basically your operating liquidity available to your business. It is represented by anything under your current assets that can be converted into cash within the next 12 months. For example, inventories, accounts receivables, cash etc.
Why is Working Capital Important?
Working capital (WC) is an important metric for all businesses as it provides an insight into how well your business can meet its short-term liabilities. Whether it is income tax, accounts payables, loans etc. Insufficient working capital means your business is unlikely to be able to meet company expenses.
In contrast, cash flow is the ability to generate cash over a specific period. Generally, businesses with high cash flow will also have high working capital.
Working Capital Requirements
Certain industries are more working capital intensive compared to others. For example, those in retail, wholesale, construction and events management typically have high up-front expenses before they get paid by their customers at much later stage.
Younger companies also usually require a higher level of working capital than mature businesses as these new companies are still going through their growth stages. There will be the initial capital outlay, spending on sales and marketing before revenues and collecting on sales invoices catch up.
It would be prudent to assess your balance sheet to understand your business financial performance and your working capital requirements.
High Level Requirement
If your business has a high level of working capital, this could mean that your business may not be re-investing or allocating working capital properly. Some exercises that your business could undertake to resolve this are:
- Conduct research & development to enhance your existing product or service or create a new line of products or services.
- Allocate more funds to your sales and marketing activities to increase revenue.
- Deploy working capital in an investment asset that gives you a steady return.
- Upskill your staff.
Low Level Requirement
According to the Digital Finance Analytics study, around 60% of SMEs are looking to borrow funds, and majority are also seeking working capital support. One of the main drivers of having low working capital is delayed payments from customers (especially from large private sector companies and some government agencies).
Invoice finance is a business funding product that allows businesses to sell their outstanding invoices to obtain cash upfront as and when they need to as opposed to waiting to get paid by their customers. Invoice finance is a popular financing tool that helps SMEs ease their late payment pain. It is also a way to take control of business cash flow and strengthen its working capital position.
Short term business loans may also be an option to help support your business working capital. A loan could be utilised to purchase an asset, increase sales and in turn, increase working capital. The profit generated will then be used to pay off the loan over its term.