Working Capital Amount

It may be difficult to assess how much small business working capital you require, plus there is more to WC than just an asset or funding over expenses. It is a must to pay attention to several details to analyze the amount you require. Besides, as your enterprise is unlike any other, you should work with a financial advisor for a better idea about your financial requirements.

Be Ready For The Most Unpleasant Situation

Determining what that worst-possible situation looks like, is among the first few things that you should do as a small enterprise owner. You must prepare for even an unlikely ‘what if’ situation as doing it will aid you in avoiding failure. It is important, given that every small enterprise owner tends to experience difficulty in opening and operating a business. Some people, such as Darn Good Yarn’s chief executive officer, Nicole Snow, describe this as a finance-related ‘stress test’.

Things To Assess

To know the working capital requirement for your business, it is important to analyze the details regarding your enterprise that include the following.

• Its present growth rate
• Which opportunities are there for it
• The industry that it belongs to (and how quickly it grows presently)
• What life cycle stage it is in at present

Imagine that it is no startup any longer, but a more deeply-rooted business. In this case, you would require a WC amount that differs from what a new business would. Anyhow, small businesses that expect to have further working capital, involving equity or debt, usually take it as they look to expand.

Put Numbers In Order

It will be good to start with analyzing your present operating cycle. Stocks, accounts receivable, and accounts payable should be part of that operating cycle. It is important to have your AR information on the basis of how long the collection from your debtors will take. On the other hand, AP details will be on the basis of the days required for you to pay your clients what you owe them.

Is it possible to fund your small business’s operating cycle, i.e., pay its monthly bills, with no external assistance? Having a shortfall means your profits may be fewer than what is ideal, whereas you may have to raise your WC to fulfill the demand. Never think that the above only happens to your small entity. Several businesses of all other sizes also require working capital additions every now and then. For instance, it is pretty normal to require a seasonal working capital boost to buy stock beforehand.

Think Long Term

Make A Business Plan

Short-term WC options are perhaps adequate for certain scenarios, but these will not help to solve longer-term/continuing capital-related difficulties. To examine this information, you should again perform a few calculations.

• What you think your expenses will be in the coming year.
• What your fixed costs are now, and will be during the coming year.
• What variable costs may come about (again, consider the most unpleasant scenario in this regard)
• How much you require to feel that your business is secure finance-wise.

Almost every business owner finds it difficult to have a financial cushion. How much would they have to keep in the event of an industry decline or a financial difficulty in their local economy? Small businesses cannot arrive at a particular figure regarding the above, because every enterprise’s requirements will be differing, albeit they belong to the same segment. At the end of the day, you should find out how much you require as a cushion, to feel like your enterprise can survive difficulties over 3 to 6 months.

Look At Your Assumptions Closely

Reviewing your business-related assumptions is one more key step in finding out what its working capital requirements are. Consider the following in this regard.

• Whether your group of regular customers will grow as your business expands.
• Whether your whole group of customers will desire your new item
• When starting a new business location, there may an estimation of your fixed costs, on the basis of the present location. Anyhow, you may not know the time required to have customers at that new location to help cover those fixed costs.

It is not easy to make decisions regarding working capital. You would not like to have more debt as compared to what your enterprise can manage. Why? Because taking on debt will reduce its profits. Be maximum realistic with regards to business-related projections. Establish conservative, modest, and even slightly optimistic business projections, and then plan for these. Besides, make a business plan with all situations outlined in detail to provide your prospective lenders with an idea about future possibilities and your specific objectives.