As concerns continue around the stability of the domestic and global economies, it is little wonder that businesses have been more cautious with cash than usual.
Due to a lack of investment, businesses may have an excess of working capital.
While it may be generally positive to have good working capital, businesses need to be aware of the dangers of having too much working capital.
Working capital is the amount of money left over once your liabilities have been subtracted from your assets.
When calculating working capital, your assets will include easily quantifiable things like your inventory, but will also include accounts receivable and customers’ unpaid bills.
Your liabilities will be made up of accounts payable and outstanding debts.
The working capital you have is generally a good indicator of the short-term financial health and the liquidity of your business so should be taken seriously.
Looking at the value of working capital is not as straightforward as it initially seems.
Negative working capital or low working capital is understandably problematic, as it means that you may struggle to keep pace with your bills in the near future.
However, there is such a thing as too much working capital.
While you need working capital to dynamically respond to changing economic pressures, you should be careful not to have too much.
When you have too much working capital, it means that you are not putting money back into the business.
Keeping a steady flow of investment is vital for growing your business and responding to challenges in the future.
If you want to further enhance your business’s chance of success, you may be trying to seek external investment.
Too much working capital puts off investors, as they may see this as a sign that you are not confident in your business’s future.
If you are not putting money into the business then why would an investor?
There is a sweet spot for working capital where you have enough to make it impactful, but not so much that it is a barrier.
It can be difficult to figure this out without help and this is where seeking professional financial support becomes helpful.
We can work with you to understand your current cash flow and budgeting needs so that you can make better decisions with working capital.
When operational costs are set to rise, it may make sense to hold back some extra working capital to absorb the blow.
However, working capital is best used to grow your business as smart investment will lead to more working capital in the long run.
Speak to our team today to become more confident in managing your working capital.
