Why Working Capital Management Results in the Need for a Line of Credit
Do you ever wonder why managing your small business finance is so stressful? Maybe you ponder about how you can separate your business accounts from your personal ones. One of the most critical questions you can ask about your business is why working capital management results in the need for a line of credit.
There is a lot that goes into the category of working capital management. Truthfully, the amount of working capital you have can literally determine whether your business succeeds or fails. That’s why managing it strategically is very important and why a line of credit may help.
Why Working Capital Management is Important
Working capital management is essential for the health and growth of your business. It is the determination that shows how well you are doing in terms of cash flow. You must maintain a good balance in order for your company to be financially solid and profitable.
The category of working capital management encompasses factors like revenue collection, debt control and your inventory operations. It is possible to have more working capital if you improve your payment policies, how much inventory you purchase and keep and when capital investments are made.
You can find out how much working capital you have by subtracting your current debts and liabilities from your current assets. What’s left is your working capital, or the money you have left to work with after you pay all your bills.
This number is a big factor in many areas of business. For example, banks use it to determine whether or not you are a good risk for an instant business loan.
When you are in danger of running out of cash, your business is at risk. Research shows that the number one reason many small businesses don’t survive to see their fifth anniversary is that they simply run out of cash.
Many people believe that when a business fails, it’s because they don’t have enough customers or their product is not good. The truth is that you can have a top quality product and a steady stream of customers and still go out of business. Just because you have money coming in does not mean your business is profitable. The key is what you do with your cash and that is working capital management.
If you don’t have cash, you cannot make payroll, purchase supplies or pay your business taxes. Working capital cash allows you to handle short term debts and expenses. An inability to handle these things spells trouble. Your creditors will sue for payment, the IRS will come after you, loyal employees will leave and you will eventually go bankrupt.
Why Turn to Financing Solutions for a Working Capital Line of Credit
It is well known that banks are not a friend to small business. They expect you to have tons of collateral and an excellent credit history. These are things that most entrepreneurs just don’t have.
Financing Solutions (www.financingsolutionsnow.com) makes it easy to get a line of credit. You can begin by answering just 10 simple questions online.
Banks don’t like to provide a line of credit for cash flow management. They believe that if you can’t manage your cash, you are a bad credit risk.
Financing Solutions only works with small and medium size businesses. The company is run by two serial entrepreneurs who understand the challenges of building a business. As a result, they look beyond your credit score when making a decision about approval of fast business funding.
When banks do provide small business funding, they tack on loads of restrictions. They dictate your payment schedule, how you must spend the money and how you operate your business during the length of the loan.
At Financing Solutions, they give you short term business financing on your terms. You decide where to use it and when to pay it back. Most small businesses use the money for a short period of time and then repay it quickly. Best of all, you can get their line of credit product without personal guarantees.
How Working Capital Relates to a Line of Credit
Events you are not expecting can occur at any time. This may include equipment breakdowns, a severe storm or a big client who is late with a payment. Even with positive cash flow, you may not have enough emergency business financing to cover it. Also, while you might be able to handle one emergency at a time, multiple crises could happen all at once. You don’t want to watch your business crumble just because you lack the necessary cash flow to bounce back.
Management of working capital today can greatly affect your goals for tomorrow. For instance, when you have the cash available to pay your bills on time, you improve your credit score. This allows you to get better terms on a quick business loan. Additionally, the more assets you have at your disposal equals the ability to do more for your business, such as advertising and recruitment.
It’s vital to calculate how much working capital your business needs to operate. Also, remember that this can change periodically due to seasonal sales cycles and current economic conditions.
You can determine your working capital needs by looking at your accounts receivable turns and inventory cycle. This is how long it takes to collect on an account and how long it takes for your product to be converted into cash.
While that is fine to exist, if you want to grow, your daily operating fund might need a boost. In addition, for many businesses, accounts receivables alone are not enough to finance the operating cycle. These are instances where a line of credit really comes in handy.
With a business line of credit, you can ensure that you always have enough working capital. You can use the money from a line of credit to cover account receivable gaps or finance growth initiatives. For example, you can purchase seasonal inventory or hire temporary staff to help complete a big project or contract.
Why a Line of Credit is Crucial for Working Capital Management
Most business owners think that the ups and downs in cash flow are unique to their business. The truth is that there are hardly any businesses that don’t have an accounts receivable gap. This is the time between clients paying for good/services and when you have to pay for your expenses like payroll, suppliers, office rent, etc.
A real need for cash often happens when a business is growing. It may also occur when a business is slowing down, at least for the first few months.
There often seems to be a correlation between when a business first slows down and more cash coming in. Therefore, a business is often flush with cash at this point but only for the short term. Soon, your expenses will be higher than your income.
If the decline in sales is only temporary or seasonal then using a line of credit is a good idea. A decline that goes on for a longer period of time spells trouble. When this happens, it is time to remedy the situation by cutting expenses.
By the same token, using a line of credit for a 3-4 month problem is a good idea. However, using your line for more than 12 months typically indicates a fundamental problem with your business.
During 9/11 or other recessions, companies who had lines of credit were able to survive. And during great growth periods, lines of credit help companies grow.
Important Whys in Business
What is your why? Often, why we do something is as important as the action itself. This is especially true for the small business owner. Knowing what drives you helps you succeed, grow and recruit the right people for your objectives. If you do not commit to it 100 percent, you will not have the dedication it takes to endure the numerous stresses and pressures of being an entrepreneur. Did you start your business to do something no one has ever done before? Is it the freedom to make your own decisions that keeps you going? Whatever it is, use that passion to help you get through anything.
Why is it essential to have a business strategy? Because winging it can only get you so far, you need to have a plan. This clarifies the vision of your company and gives direction to your staff. You must have a blueprint for how you will deal with the competition, meet the expectations of customers and sustain long term growth.
Why is it critical to have access to immediate business funding? You never know where or when the next problem or opportunity will happen for your business. They say that luck in business is nothing more than a combination of preparation and opportunity. Therefore, it’s up to you to make sure your business is always ready to take advantage. Therefore, it’s smart to get a line of credit from Financing Solutions before you actually need it, just in case. You will feel lucky that you did.