The importance of working capital for your business

When it comes to valuations, the impact of working capital for your business is significant. This concept refers to the cash tied up in inventory and debtors, partly funded by payment terms from creditors. Managing working capital can genuinely be the difference between success and failure, so it makes sense that these metrics impact the valuation.

Of course, there are other positive impacts on your business from managing working capital properly, as our friends at Geddes Capital set out below.

Working capital is vital for every business – without it, your business will be unable to fund its day-to-day operations, meet short-term obligations and most importantly, grow! As the saying goes, cash is king for any business.

The most important factors to consider for effective working capital management are inventory, accounts receivables, and accounts payables. Any pre-payments from customers can greatly boost a company’s working capital ratio. However, with tougher payment terms negotiated between suppliers and off-takers, many SMEs are finding trouble balancing their working capital ratio to meet short-term liabilities whilst striving to grow business.

Ensuring a healthy working capital position requires optimal and efficient operational management within a business – if managed effectively a business will thrive, not only being able to generate cash for growth but allowing the company to streamline processes along the value chain thus lowering costs incurred along the way.

These are our top 5 reasons why working capital is so important for your business:

1. Improved credit profile

Every growing company at some stage or another will need to reach out for an external funding line. Whether this is direct with a bank or a company such as Geddes Capital, the first thing any lender or funder will check is your credit rating.

Ensuring your credit rating remains intact is crucial; this is achieved by managing your working capital and meeting all short-term liabilities timeously.

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2. Increased Profitability

Remember, you don’t want to have too much working capital on hand, as cash should be earning a return. However, by correctly estimating the required working capital balance, these additional funds can be invested into other short-term projects or investments that may well result in higher profits.

3. Uninterrupted production

A company with sufficient working capital can afford to buy raw materials and pay for running costs as and when they are needed, ensuring an uninterrupted flow of production.

This is not only important for reputation but also allows a company to pursue new contracts and clients whilst growing its production line. Being able to seize new opportunities easily is what elevates a growing company above its competitors.

Market edge and reputation

4. Market edge and reputation

Being able to pay your creditors and fulfil orders timeously builds strong foundations for a growing entity. In this digital age, building a good reputation with all associated parties is vital.

5. Be Prepared for the unexpected

Most SME owners know their business well enough to predict seasonal revenue fluctuations and market trends. However, those unexpected system shocks can destabilize even the most well-run business. As illustrated by the pandemic, the unexpected will happen to every business and although an extreme example, being prepared for market fluctuations, rising costs and other challenges. This will ensure your business continues to thrive in even the toughest of situations.

Online Business Valuations working capital for your business

These insights were provided by Geddes Capital. They understand importance when working capital for SMEs along with associated challenges faced trying to effectively manage cash flows. Their financing options are flexible, creative and solution-driven. Geddes Capital can assist your business in freeing up valuable working capital through several services such as bridge funding, invoice discounting, trade finance and inventory funding.

Geddes Capital is independent of bizval and the views expressed above are solely those of Geddes Capital.