How Much Working Capital is Enough?
When it comes to working capital, you know that it is critical for many things, including running your business efficiently and for things like securing credit when you need it. Knowing how to determine the right amount for your business will help you to determine if you are operating with enough.
Analyze Your Cash Flow
Is the capital you currently have on hand enough to handle your expenses and support your cash flow? This is the first thing that you want to look at. If your cash flow is not as high as you need it to be, you will have to rely on the capital your business has to work with to make up for the cash flow problem. In addition, you have to look at your overall business expenses and see if you can keep up with only the capital you are currently working with. Remember that you want a steady amount of capital that you can increase over time and you need this to work with your cash flow and after your operating costs.
Look at Industry Trends
How much working capital is the average for other businesses in your industry? This can give you a target to shoot for. Of course, many factors play in and the right amount will vary among individual businesses, this gives you a number that you can use as a starting point in determining the right amount of capital for your business.
How Much Incoming Money You Need for the Year?
Consider your profit goals and operating costs and determine how much money you need to make to support these. This gives you a minimum number to shoot for in terms of your company’s gross income. From here, you can see how much capital is needed for things like unexpected expenses. Once you have both numbers, do the math and ensure that you are earning enough to support both.
Are Your Looking to Expand?
If you are looking to expand your business determine how much capital you need to bring this to fruition. This is important whether you plan to self-finance your expansion or if you will use a line of credit to do it. Make sure that you are not exhausting all of your capital if you choose to self-finance.
Use this information to ensure that your business has enough working capital to keep things flowing smoothly. Make sure that you are constantly evaluating it to keep it at a steady and growing rate.