Why is Working Capital Important for Business Success

What Is Working Capital?

Working capital is fundamentally the lifeblood of a business – any business including franchises. Should you compare your business into a vehicle (car, truck, bike, big rig, etc), it is 1 thing to purchase or own an automobile but it’s then another to make that automobile go down the road – getting you from point “A” to point “B”. To do it, you require a form of fuel – gas, diesel, electricity, biofuels, etc.. Without that fuel, your vehicle will only sit around collecting dust. 

Working capital can come in many forms from getting (financing or obtaining) inventory or raw materials to obtaining or having the money available to cover needed utilities, and even lease.

In business, to earn your business operate efficiently, you also need to add fuel to it in the shape of working capital – to – get it from point “A” to point “B” or out of startup to growth or growth to growth or growth to achievement. Know more about working capital adjustment here.

Image a franchise (let us call it “Any Time Tools and Machines”) land a brand new, large customer that wishes to purchase 1 million dollars worth of their services it provides (supplying machines and tools for huge construction projects) – but it does not have enough of those machines and tools on hand for this particular endeavor and cannot afford to get more appropriate now to finish that job – that will take some $100,000 in additional leases or rented equipment. The franchise can’t knowingly agree to that job and thus that customer takes that $1 million elsewhere.

Since the start of time, businesses have faced working funds short-falls that have essentially destroyed their companies. These businesses have done everything correctly up to that fatal point. They’ve driven clients to their companies and provided the products or services those customers wanted. Yet, due to bad working capital management, they get more customers than they to possess the funds on needed to service and are forced to turn those patrons away – not losing that business however creating a negative feeling in the community that keeps additional, new clients at bay (and of course the business that agrees with a project or order and can’t fulfill it and thus gets sued to death for it). Learn more about the basic valuation model.

Or, a residential blinds installation franchise receives a contract to set up blinds and shades in a recently constructed apartment complex that needs to be done in the next 30 days but won’t get paid for the job for another 60 days when the apartment complex does its final closing. However, the franchise needs to turn down this $250,000 job since it doesn’t have or can’t afford the labor needed to complete the installation in another 30 days (because that new labor will require – by law – to be compensated ahead of the 60-day apartment closing and subsequent payment for the franchise’s solutions).

Working Capital – Always Necessary To Building A Steady Cash Flow

Steady cash flow is that which can keep businesses running smoothly for several years. From time to time, business owners forget to concentrate on this essential element which can help their businesses to survive and maintain despite growing competition. However, they’ve got access to different working capital financing choices for handling adequate cash all of the time. The capital generated by financing can be instantly used for the purchasing equipment, production, worker’s payroll, lease, and other types of operating costs which are a part and parcel of business. Even the most established business houses will have to consider capital financing when unexpected costs arise. By obtaining a clear idea about the funding options, the business owners will be able to arrange their capital funds profitably and meet all of the business-related expenditures, which will again provide them with greater financial stability in the future.

Capital is the lifeblood of every little and large-sized company. When there’s a shortage in the capital, the company’s capacity to market, fund operations, and meet production costs and payments become affected badly. Therefore, it’s better to find out a firm’s working capital status before making any kind of investment decision. One of the greatest ways to continue with funding raising for a company and meet its regular cash flow demands would be to take advantage of different capital financing options available on the marketplace.

Merits Of Working Capital Financing

Capital finance addresses the cyclical or seasonal funding demands of businesses. It builds up temporary assets necessary to revive performance and generate revenue, but which can be retrieved only after giving cash payment.

Capital financing options guarantee benefits to businesses in some ways. Let’s review a number of them.

Money funding also aids in sustaining an organization’s growth.

Working capital funding is utilized to undertake activities that can add to business operations and become successful, such as advancement in the manufacturing unit, continuing process and product enhancements, and market growth.

Working capital funding allows companies to put money into short-term assets that help it working successfully. It is helpful to raise capital for prepaid business costs, like security deposit, licenses, insurance policies, and many more.

Capital Finance – A Commendable Option For Small Businesses

Working capital financing is important for small businesses. As compared to medium and large businesses, small companies have minimal or limited access to the equity capital market and other recognized sources of long-term capital. That’s why they must rely heavily on short-term debt solutions, most of which are closely associated with cash funding. However, limited access to equity and reliance on short-term debt causes a rise in the need for a small business’s cash flow, decreases liquidity, and develops financial leverage-all of which may result in an increased financial risk of passing charge. Moreover, small businesses may face trouble in raising short-term debt rather than getting enough help to ensure the long term debt required to boost their financial standing and liquidity and minimize their credit risk. The working capital fund can play a key part in addressing this issue, especially by putting debt conditions that promise to keep a company’s credit risk at the bottom.

Conclusion

Therefore, if you do not want to squander your time and destroy your franchise until it even has an opportunity to succeed, then ask yourself this question; “What are the 3 things I can do immediately to guarantee the long-term growth and achievement of my franchise?”

Place, location, location is the driving force that could break or make your franchise from a marketing standpoint – putting your business in the route of potential clients. But, just because you have those customers patronizing your business, if you do not have the working wherewithal to satisfy those customers – now and keeping them coming back – then your location, in the long run, really means nothing.

Then, from this article, you can find your response – that is “working capital, working capital, working capital.”