If You Are Running a Startup, Better Learn How to Leverage Your Working Capital

Here's why working capital is important for any new business.

Financial trends and news by Michael Sanduso
October 20, 2017 last edited October 20, 2017 10:41 AM
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business startup working capital

When you read articles about startups, many of them discuss steps in how to launch them or how to automate your business processes. I haven't seen many going over how to survive once you get launched.

It is common knowledge that the goal of every business is to make money. If that wasn't the goal, it may as well be a not-for-profit, but even they have to bring in money. Therefore, the bottom line always lies in the dollars.

What every business needs is working capital to keep all of its moving parts well oiled. People who have been running their business for some time now fully understand the importance of cash and cash flow to the health and viability to their company. If a company has a strong positive operational cash flow they don't have to worry about getting a loan in order to cover their working capital.

Working Capital Important in More Ways Than One

The importance of understanding exactly what your working capital is worth is more important than you know. Working capital can give you a great amount of insight into the financial health of your company - it is strong working capital that enables your startup to rocket forward.

When your company is able to sustain a certain degree of working capital, you will be able to pay off your short-term expenses and debts with ease, as well as setting cash aside for investment into the future of the company.

You Need to Improve in Managing Your Working Capital

There are various skills and wisdom one must have in order to handle your working capital needs more proficiently. Gaining all of this skill and knowledge takes time and money. But when your business hasn’t matured yet, this sort of skill and knowledge must be understood even more so than during any other time.

Some Solutions to Maintaining Working Capital

  • Selling Your Invoices for Immediate Cash. Selling your invoices to obtain working capital is a very popular thing for companies to adopt. They call it invoice factoring. It's common for startups to hit a dead spot now and then. This prevents them from further product development and prevents other points of company growth. For so many new startups, this dead spot can seem never-ending. A lot of founders give up eventually, especially if they don't know their options. Looking at your two options: 1) Halting your business’s growth by avoiding getting a loan or 2) Get some financial help by getting financed. You can avoid both by invoice factoring.
  • Discounting and selling of your old stock. Since working capital is most often than not linked to stock, this can become an inhibitor. If you have old stock that hasn't’ moved in six months or more, it is time to sell it off. The money you get from liquidating your old stock can go towards your working capital.
  • Overtrading kills your working capital. Overtrading is when your company purchases more products than it has customers to buy them. Overtrading can also occur when you have promised a product or service that doesn’t meet the consumer's’ expectations.