There have been a lot of concerns around the domestic and global economy in recent times that have led to businesses being more cautious than normal.
A side effect of this hesitance may be an accumulation of working capital.
While working capital is a sign of business success, it is worth understanding how too much working capital can be a problem.
What is working capital?
Working capital is the difference between your company’s current assets and its liabilities.
Your assets include those that are easy to quantify, such as your inventory, but for the calculation of working capital, it also includes accounts receivable and customers’ unpaid bills.
Liabilities mirror this in that any accounts payable and outstanding debts are considered on this side of the calculation.
Once you remove the liabilities from assets, the resulting amount is the working capital your business has.
This figure is regarded as a good indicator of the liquidity and the short-term financial health of the business.
Why would too much working capital be a bad thing?
You may see working capital as a number that should be increased as much as possible.
While this can demonstrate a masterful skill in balancing assets and liabilities, it may be an indicator of a lack of confidence in your business’s future.
The problem with negative working capital is apparent as it signals that your business is unable to continue paying debts in the long-term and could face financial trouble.
Yet having too much working capital means that opportunities are passing you by without you embracing them.
A good working capital is useful for letting your business dynamically adjust to changing financial situations, but working capital alone is not helpful for business growth.
If you are hoping to attract more investment from external sources, a high working capital can be off-putting.
The logic from investors is that if you do not invest in your business, then why should they?
How do businesses balance working capital?
Working capital is an eternal balancing act that will keep you occupied for the entire time you run a business.
Like Goldilocks, you want to find the exact right spot where you have just enough working capital to stay resilient – not too much or too little.
Seeking expert financial advice is imperative for finding this comfortable middle ground.
This will mean getting advice and support on when and how to funnel working capital back into the business and when to keep it for a rainy day.
The effective utilisation of working capital is the key to keeping a business growing even as times are tough.
With operational costs set to increase in the new tax year, some working capital will need to be kept aside to absorb the blow.
As such, let us advise you on some effective strategies to balance your budget and make the most of your working capital.
Master working capital by speaking to our team today.
