At GCE Business Solutions we like to break down funding into 2 main categories viz.: Everyday Financing and Event Based Financing. I would like to introduce you to Everyday Financing. This is financing that keeps your business going on a day to day, week to week and month to month basis. This is essentially the lifeblood of your business and in business terminology it is called WORKING CAPITAL. Let’s jump into an introduction to Working Capital.

Working capital: Why is it important for business growth?

Working capital is a fundamental part of any business’ success – after all, cash is king. But what about the specific impact that working capital can have on a business’ growth? And how can businesses use working capital most effectively to accelerate this growth?

What is working capital?

Working capital, also known as net working capital, is a financial metric that measures a company’s liquidity and short-term financial health. In simple terms, it is the cash that is needed to keep a business running day-to-day.

Working capital represents the difference between a company’s current assets and its current liabilities:

• Current assets include cash, accounts receivable and inventory.
• While current liabilities include accounts payable and short-term debt

Working capital is often an indicator of a business’s financial health, as it reflects the company’s ability to fund its day-to-day operations and meet its short-term financial obligations. Positive working capital indicates that a company has enough readily available cash to cover its current liabilities, while negative working capital indicates a cash deficiency.

Many fast-growing businesses find that their working capital is quickly eaten up as they win increasingly large clients and contracts. In these instances, the business can be highly successful, with a positive growth profile and still struggle with cash flow – which is why it is important that lenders take a holistic view of a business’ performance.

Why is working capital important in a business?

Working capital is important for several reasons:

It provides a bill of good health.

Positive working capital indicates that a company has enough current assets to cover its short-term financial obligations. It is often considered to provide a sound measure of a company’s financial health. This ensures that the business can continue its operations smoothly and avoid any disruptions.

Working capital efficiency = Business efficiency

Managing working capital effectively helps reduce the operating cycle of a business. A reduction in the time it takes to move through this cycle improves the overall efficiency of a business and makes it more likely that there will be cash spare to invest in additional growth opportunities.

Capital or Cash is king when things go wrong.

A strong working capital position can also protect a business from the unexpected. When the going gets tough, cash is king and the ability to cover short-term expenses, even when facing unforeseen obstacles, can help a business to avoid financial difficulty.

How can working capital help your business grow?

Given the above, working capital can play a crucial role in helping a business to grow. Here’s a list of some of the key ways that working capital impacts a business’ growth:

Funding growth

A positive working capital position means your business has the financial flexibility to invest in new products, expand into new markets and/or acquire other businesses. It means you have the necessary cash flow to support whatever growth initiatives are most appropriate and empowers you to take advantage of opportunities that will give you a competitive edge, as they arise.

Sustaining growth

For your business to succeed long term, investment in growth must be financially sustainable. Effective working capital management ensures your business’ cash flow remains healthy even when investing in new opportunities.

Strength in your numbers

A strong working capital position usually means a strong financial position. Healthy finances become even more important when you are ready to take growth to the next level. A demonstrable track record of your working capital management can go a long way in boosting your business’s credibility.

Weathering the storm

Having sufficient accessible cash provides a buffer for unexpected expenses or a decline in sales – this is always important, but when you are aiming to grow, it gives the business the stability and resilience to navigate tough times and continue on your growth trajectory.

If you would like to have a conversation about Fundability for your business, connect with Jacky Buys on 021 882 8033 or jbuys@wauko.com.

This article was written by our Gavin Ellis – CEO: GCE Business Solutions – click on this link to find out more.