It is very difficult to tell how much working capital the business would require to run smoothly. Especially on the factors like the operating cycles, type of business and the future goal of the business, the working capital is dependent. While in the case of various large businesses, it is obvious to have negative working capital as they can quickly raise the fund.
But in the case of a small business organization, it is important to have positive working capital. With the help of the various sources of working capital finance, one can keep their business operational.
Type of the business
The type of business is an important factor that tells us how much working capital the business requires for its operation. For instance, a business with physical inventory requires a huge amount of working capital to have a smooth operation. It can include both the wholesale and retail business.
Manufacturers must purchase raw materials and continue to produce the inventory. While on the other hand, the wholesalers and retailers must purchase the inventory already being produced for sale to various customers or distributors. Every seasonal business requires high working capital to keep its business running. Departmental stores or grocery stores must increase the stocking and inventory during the peak seasons to accommodate the expected influx of diverse customers.
Moreover, a business that offers intangible services and products like online software providers and consultants requires low working capital. Also, the businesses that matured long ago and did not have any growth plan require low working capital. But in all cases, the business must keep its origin of working capital finance intact during the crisis period.
A business should pay the short-term debt with its revenue from its sale. However, the length of the company’s operating cycle makes this process impossible. Companies that require a long period to create or produce and sell a particular product need to have more working capital. It would ensure financial security during the period.
The specific goal of every business owner is one of the important factors that help determine the amount of working capital. If the business organization is new and looking for expansion, it would require higher working capital. But a business organization that does not have any future intention of growth would not require that much working capital. It is particularly true for businesses planning to expand their product lines to venture into new markets. There the cost of design market research would be considerable.
Hence if you are looking for the amount of working capital that you require for your business, you first need to know what is working capital. Along with that, one must keep these specific factors in attention only to ascertain the amount of working capital required for business growth.
In addition to that, some business organizations must indulge in working capital loans to navigate through the cash crunch. This capital would help the business to operate continuously without getting any interactions in the short run. But one needs to optimally handle the working capital to ensure financial stability in the long run. Only then would the business grow and expand to its full potential.
The needs of every business are somehow unique. Hence the working capital requirements also vary from one business context to another. Ensure that you efficiently control your business finance to make your business a successful one.