What is working capital? A working capital is the difference between the current assets and current liabilities of a business. This is a measure that is useful to businesses in order for them to be able to measure the ability to complete their day-to-day operations, which in turn mirrors the business’ financial health.
With an excellent or a well maintained working capital, a business is able to buy new equipment, materials, and are able to improve the running of the business. This ensures that the employees enjoy a proper and good salary, working environment, and ensures that the business light is always on.
Some readers might get confused between a working capital and a cash flow, but their difference is that while they are similar, a working capital is the situation of the business currently. Meanwhile, a cash flow measures the ability of the business to generate cash in a specific period of time. Usually, when a business has high cash flow, it also has high working capital.
Generally, a business will always want a positive Working Capital because it will work as a safety net for unexpected expenses and can even be reinvested into the business in order to keep it running efficiently.
Here are 7 more importance of a Working Capital for Business growth:
1. ACTS AS A SAFETY NET
This cannot be emphasized enough. A working capital, and a positive and high one at that, is always beneficial to the business as a safety net. While there are a lot of benefits using short term loans or long-term loans, using the business’ own working capital allows for it to alot their loans to more important things.
2. MAINTAINS GOOD CASH FLOW
As mentioned earlier, the higher the cash flow is, the higher working capital a business has. But a high working capital also benefits the cash flow as the business is able to not only maintain the business but will be able to improve and make it work efficiently in order to get more cash flow.
3. BRIDGES PAYMENT DELAYS
A business’ working capital can be used in situations where the cash flow isn’t all that good without the fault of the business, for example, for when a client is late in paying. And most businesses aren’t surprised by this, there will always be clients who pay late.
4. IMPROVING THE BUSINESS AS A WHOLE
Improving equipment, software used, faster machineries and latest business technology can go a long way in ensuring that your business grows and improves. Your working capital can help ensure that your business only has the best.
5. MANAGES EMPLOYEE EXPENSES
Your employees are human beings much as yourself. Even in a healthy working environment, employee expenses come up that are not payslip expenses. There are recruitment costs, emergency loans, and even events for employees’ wellbeing and happiness in your company as a whole. Your Working Capital can help you with these kinds of expenses.
6. A GOOD CREDIT RECORD
There is one more thing your working capital can do for the business. It’s that it can be used to indicate the overall economic health of your business. And when you’re looking to establish good credit, a good and strong working capital can go a long way in ensuring that you have a good and reputable credit score.
7. INVESTING AND ENSURING GROWTH
Overall, your working capital can also be used when there are sudden opportunities that come into your business’ path. Surprisingly, it is more common for businesses to not be able to grab an opportunity when it shows itself due to the fact that it is not prepared financially. Your working capital can help your business make investments for its growth.