Neglecting your Working Capital – Consider the Consequences

Posted by Gil Oliva on Fri, Mar 20, 2015 @ 08:00 AM

If you deduct your current liabilities from your current assets, another words, assess your working capital, how healthy does your company look? Your current working capital keeps your company afloat. Sadly, too many businesses flounder every year due to poor working capital management and cash flow forecasting

Working capital for businessesThis is a subject frequently covered in many finance blogs because of the significant problems that arise from poorly managed working capital. It is too easy to start fulfilling orders as they come in with little regard to when payment for those orders will be made. The delicate balancing act can work for a while, but an unforeseen expense can throw the scales off, and not in your favor. When working capital is neglected, there are several potential pitfalls. 

Inability to order product – if inventory is key to your business, lack of sufficient funds to order more product or pay your suppliers means you will ultimately let your customers down. Inventory needs to be constantly replenished, but too many late payments to your suppliers render you unreliable. Sales will suffer, customer happiness will suffer and your business will slow down. This can be an extremely hard situation to rectify 

Unexpected bills may have to be paid late – Or worse, if those bills must be paid, you may not have enough liquid assets to pay your staff, or other operational costs. This will lead to dissatisfaction all around. Late payment on high profile liabilities such as rent or loans could mean a substantial hike in interest rates, damage to your credit, liens on property, and penalties for late payments. 

Regular analysis of your working capital means you will always be aware of possible shortfalls when it comes to operational costs. Careful business forecasting helps evaluate the activities of your competition, and any projected market changes. Analysis may show that there are plenty of invoices outstanding, and that your cash flow could be in great shape if only your customers would pay on time, or you had not extended credit terms. In this situation, if access to that working capital is vital for any of the reasons above, there is a simple alternative funding solution that simply helps businesses with their working capital needs. It allows you to maintain operations while waiting on accounts receivable payment. 

Invoice factoring is obviously not the only option when it comes to accessing your working capital. Each type of funding involves different requirements, some much more stringent than others. Options include: 

  • Revolving line of credit
  • Short and long term business loans
  • Equity Financing
  • Small business loans and special government subsidies from the SBA

Obviously the most devastating outcome for a lack of working capital management is bankruptcy. Once debts mount up, and customers lose faith, it is hard to make the turn in the road and recover. Don’t neglect your working capital, there are many organizations out there willing to help. Remember, it is easier to make a plan for access to your working capital before it becomes essential!

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Topics: Cash Flow, Working Capital, Business Forecasts

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