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Working Capital 101: How Much Working Capital Do I Need?

Working Capital 101: How Much Working Capital Do I Need?

Doing your working capital homework is a great start. Every business needs it at every level to be successful. It helps you take care of all your company’s operational functions. What varies from business to business is the amount of money you need. Before applying for working capital funds, you’ll want to know how much working capital do i need. Use this guide to learn how to do the math.

How Much Working Capital Do You Currently Have on Hand?

Before seeking out funding, see how much working capital you have on your own. SBA experts consider working capital as liquid assets or those easy to convert. Working capital is simple to calculate. The basic format is to deduct your liabilities from your assets. Assets are cash flow or what can be quickly liquidated. Liabilities are expenses due within the same year.

Your end number is what you can use to pay employees, buy supplies and equipment, and fulfill orders. You can also use the money for cash flow or emergencies. A crisis can happen in a moment’s notice. Even with the perfect risk management strategy, you may have some expenses. The good news about knowing your working capital number is you can improve it. Ask yourself the following questions.

How Will You Use Any Additional Working Capital You Obtain?

Alternative lenders are making sure funding sources are not a problem. The options are there, but you should still know your business before applying. All Business suggests having a clear understanding of why you need the loan. You need to know how you’ll spend the money and when you can pay it back. Doing your homework helps you understand where your funds are coming up short.

Calculate Your Shortage to Answer How Much Working Capital Do I Need

The first step is to examine where your revenue is coming from (accounts receivable) and how it’s going out (accounts payable and inventory). Look at what your funds and expenses are allowing you to do. If your working capital number is negative, that’s a big problem. If the number is positive, is it enough? Would you be able to fund a large order or big project in house?

Let’s say your business produces sports equipment. With current arrangements, you have enough equipment for each sport during its season. The demand shifts when your county’s school system wants to contract with you directly. They want your company to supply uniforms, helmets, and accessories for all sports program at each school.

In this scenario, you would need enough funds to pay manufacturers. If you make equipment, you need more supplies. That might also require better, faster machinery. You’ll probably also need more workers. A larger operational space may also be on the list. Knowing how you can fund this project lets you know the strength of your working capital.

Know Your Season

If your business retails Halloween supplies, your season is the last quarter of the year. That’s when you generate revenue. The rest of the year, you’ll be maintaining. In the quarter before your money making season, you must invest in promoting the business. That means your working capital goes to maintenance and marketing. Even if you’re not a seasonal business, most businesses have a season.

For instance, some businesses boom during the holidays. Others may nearly close their doors. Restaurants and stores in cities with festivals reap the benefits of customer spending. They’re in the mood to dine and party. Companies in other industries may have their businesses blocked during the festival, making it hard to operate. Knowing these situations will happen helps you prepare for it.

Track Your Working Capital on a Regular Basis

Part of your job is to make sure you always have enough to fund operations and take care of emergencies. Even if your working capital is positive, that could change. The numbers will fluctuate all the time. Monitoring where you stand with working capital will help you stay in the black. It will also help you keep track of where you are financially (positive or negative).

Knowing your financial activity ahead of time helps reduce damage from potential threats. It also helps you stay on top of your goals. Here are a few things you can do to keep track of your working capital:

Use a financial system or software. This may be something your bookkeeper or accountant handles. Work closely with them to stay aware of the numbers.

Review your assets and liabilities. You need to do this often. Clients will come and go, but so will some of your debts. All this activity changes where you stand with revenue and, ultimately, working capital. Decide whether you want to take a look at this weekly, bi-weekly, or monthly.

Use what you’ve learned about your business to figure how much working capital do I need. After reviewing business operations and financial activity regularly, you’ll understand how the process works.

How Much Working Capital Do I Need?

Just like a new parent, a new business owner probably won’t have a clear answer to this. As you continue nurturing your baby and learning business flow, things become automatic. You’ll know what you need to handle and how much it will take. Your working capital is that number plus funds for the unpredictable that is inevitable; emergencies.

Working Capital Action Steps

Step 1: Start by keeping track of your numbers

Step 2: Work on staying in the black by: paying down temporary liabilities, adding more funds.

Step 3: Come up with a target number. The amount of liquid assets you want to maintain.

Step 4: Make a list of potential business risks, threats, or emergencies.

Step 5: Create a plan to handle emergencies with the smallest financial impact.

You’ll always need working capital. Things do get better when you learn how to manage it. There’s a critical point for figuring how much working capital do I need. The purpose is to get you to where you don’t need a boost every year. Once you can fund projects or business needs, it will help you. Your business should be making more money and paying down debt in the process. Both of those actions will free up more cash flow. Have a system to manage cash flow and your business will continue growing.

Let LenCred Help You Increase Your Working Capital

The experts at LenCred are always here to help. If it’s one thing we know, it’s how to help entrepreneurs get unsecured funding. We’ve been working with small businesses and lenders for years.  If you need to know more about your options for working capital, you’ve come to the right place. We’ll help you figure out how much working capital you need. Then we’ll pair you with the right lender to get the funds you need.

About Brittni Abiolu

Brittni AbioluBrittni is a millennial, entrepreneur, investor and philanthropist. She has a Bachelor of Science in Computer & Information Systems from the University of Detroit Mercy and is currently a student in the Master of Entrepreneurial Transactions program at Central Michigan University. She enjoys writing about her experiences over the past 10+ years as an entrepreneur and uses data and information from reliable sources to back up what she writes about. Through her writing she aims to educate other entrepreneurs on how to obtain capital and build successful businesses doing what they love.

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