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Working Capital: What is it and why does it matter?

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In the world of business, it’s often said that ‘cash is king’. But having enough cash on hand to maintain your operations is what truly matters. This is where working capital comes in, and in this article, we will explore why it is so important for SMEs.

What is working capital?

Working capital is essentially the cash a company has on hand to manage day-to-day operations. It’s calculated by taking the total of your current assets and subtracting your current liabilities.

This information provides a short-term evaluation of your financial strength and also says a lot about how you’re running your business.

Understanding how the working capital cycle relates to your specific situation and industry is a key component of maintaining a fully-functioning business that can meet its obligations

Why does managing your working capital matter?

Working capital is the foundation of any business, and a lack of discipline in this area can lead to trouble. Even with a large order book, lacking the resources to service that demand and/or your expenses can cause serious problems.

Dedicated work in managing resources to operate is a crucial part of running a successful business.

• It manages cash flow gaps

In any business, there’s always some lag time between when you must pay your suppliers and when you get paid by your clients. A robust strategy helps you to manage these periods.

• It provides a margin of safety

Things don’t always go to plan, but managing your liquidity needs can help inoculate against curveballs that can lead to serious problems for your business.

• It smooths out operations

Maintaining a steady level of working capital in the business will help reduce uncertainty and provide a more efficient base of resources for your team to use. The effect is better long-term planning, more efficient decisions, and reducing month-to-month anxiety.

It’s for these reasons and more that getting on top of your specific needs is so important.

How Do You Manage Your Working Capital?

There are a variety of actions that you can take to improve your working capital management, depending on your specific circumstances. But here are some to think about:

1. Track it and measure the impact  

You can’t do anything until you have the data you need to understand your working capital needs. So, take some time to evaluate your current operations and assess your ideal working capital level. Remember that this can change as your business grows and expands

2. Improve your payment terms  

By negotiating your payment terms with suppliers and/or clients, you can help to minimize cash flow problems and arrive at a healthier financial position long term. This could be difficult regularly, though, as you must convince your stakeholders that it’s worth doing. With Bancoli, your clients are rewarded for paying early with either early payment discounts or yield, which could guarantee timely payments.

3. Invoice Financing 

You can circumvent the cash flow lag discussed above through an invoice financing product which will buy the invoice from you and allow you to be paid immediately, net of a small fee. This instant liquidity is a huge advantage for many companies who previously had to chase clients for payments.

4. Supply Chain Financing 

If you have good relationships with your suppliers, you can both enter a supply chain financing agreement that manages working capital on both ends and aims to arrive at a win-win scenario. The more you get this right, the smoother the entire process becomes.

These are just a few ways that you can improve your working capital management. And when you get it right, your entire business can transform and level up. Getting to grips with it is an investment of time and effort well worth making.

Bancoli is a fintech-first international payment, invoicing, and banking platform that optimizes supply chain efficiencies through guaranteed invoices, maximizing your working capital. Take your business to the next level with Bancoli’s solutions.

Join Bancoli today to learn more about how we can help you grow.

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