Small Business Working Capital – Tips from the Most Open-Minded Lender in the Market, Bizcap
Nov 14 2022
Working capital is vital for every business – if you don’t have enough, it can be a problem, regardless of how profitable you’re going to be in the future!
Here’s everything you need to know about working capital, along with some solutions to help bridge any gaps your business may have.
What is working capital?
Quite simply, working capital is the cash – or cash equivalents – your business has available at any given time, minus the money you owe this year.
How do I work out my working capital?
Working capital is calculated by subtracting your current liabilities from your current assets.
For example, if you have $24,000 of current assets and $18,000 of current liabilities, your working capital would be $6,000.
What type of things are classed as current assets?
Current assets can include: cash; any invoices you have issued; expenses you’ve prepaid; and inventory.
What type of things are classed as liabilities?
Liabilities are anything you owe: invoices you’ve not paid; payroll; any goods or services you’ve been prepaid for but haven’t delivered; anything you owe to the Australian Tax Office (ATO); and any short-term loans or debts (plus any portion of long-term debt repayable over next 12 months).
Why is working capital important?
Working capital is a great indicator of the health of your business and it’s useful for not only you, but potential investors also. Companies that end up going out of business usually do so because they can’t meet current obligations.
What are good and bad working capital ratios?
It depends on your business, but generally, a ratio of 1 – i.e., you have double the money you owe – is adequate. A ratio below 1 indicates things are tight, while under zero means you can’t repay the money you owe.
Good working capital is usually benchmarked between 1.2 and 2.
Can your working capital be too high?
In some respects, yes. If your working capital is high, it may be a sign you’re not reinvesting enough cash into the business effectively, meaning you could be missing out on potential growth opportunities.
Is working capital the same as cash flow?
They’re similar, but not the same…working capital gives a snapshot of the moment, whereas cash flow is an indication of the money the business can bring in, over a specific period. If your working capital is too low, your business could find itself encountering difficulties.
A good example that highlights the difference is if you, for example, purchased $30,000 of stock: your cash flow would decrease as you’d have spent that money. However, your working capital would remain the same as you’d still have that value of the asset in stock (inventory).
Can working capital be low, and cash flow be strong?
While most businesses with a high cash flow may also have high working capital, that’s not always the case. Your working capital could be low, but your projected future sales are strong – this may cause short-term issues when it comes to paying bills and wages, but in the longer term, the business looks healthy.
What can I do to ensure I don’t run out of working capital?
If you need a working capital boost to meet repayments, or need cash to invest into the business, there are several things you can do. They include liquidating some longer-term assets (for example, selling and leasing back equipment), attracting investment, extending debt terms and/or taking out some business finance.
If you do find yourself in a situation where you’re low on working capital, lenders such as Bizcap offer Unsecured Business Loans and can get SME owners access to the capital they need, within the day.
If you’d like to apply for a business loan and you meet the requirements below, click here.
- Your business has been operating for a minimum of 5 months;
- You have an active ABN/ACN;
- You have a minimum of $12,000 in monthly revenue;