If you’re struggling with cash flow—and what small business hasn’t been there—or just feeling stuck in general, could it be that you need working capital?
Many equate the need for capital only with starting up or the early years of being in business. True, businesses at these stages definitely need capital. But once the business gains some momentum, business owners may think they need to make it work without additional funding.
The truth is that growth requires capital. And the more you grow, the more capital you need. So says John Mariotti, president & CEO of The Enterprise Group, in The Working Capital Trap, published on openforum.com.
Mariotti says that the most common stumbling block for small businesses to achieving profitable growth is shortages of working capital.
Coining the term, the “working capital trap,” Mariotti points out the long lead times in any number of business functions. Launching a product is just one of them, in which cash outlays and expenses occur from the very beginning of the process, even at the inception of the idea. This “cash to cash” period is a long, long time between beginning work on a product, when it’s actually sold in the marketplace—and finally, when you actually get paid for those sales. Throughout the process, you’re constantly pulling from your cash reserves or working capital to pay expenses and stay afloat, obviously straining your available cash for things like payroll and rent.
There’s more from Mariotti, including some recommended solutions. Check them out here.
Contributor Maryalene LaPonsie offers some working capital tips for small businesses on smallbusinesscomputing.com and starts with the basics:
- Understand that you’re going to need working capital to grow throughout the life of your business.
- Regularly review your revenues and expenses.
- Use industry benchmarks to create projections and a working capital target for your business.
LaPonsie’s tips include:
- Just-in-time inventory. Shift from stockpiling large inventories to timing shipments to arrive closer to when you need them.
- Re-evaluate your invoicing, collection and payment procedures. Do this on a regular basis. Look for places to shorten the cycle, and of course, always be looking for smart ways to reduce expenses.
- Keep an eye on the future. It’s important to look at all aspects of your business through a strategic lens, and to never let your working capital get too low.
If you’re feeling stuck or unable to grow your business to the next level, you might consider an infusion of additional working capital. Business owners may cringe at the time, effort and possible rejection involved in applying for a loan or line of credit from a bank. Statistics show that banks have dramatically reduced lending to small businesses over the last several years and have tightened up their lending criteria.
But the good news is that there are a growing number of sources of working for small and medium-sized businesses. Once thought to be “alternative,” these companies have come into the mainstream, filling a huge void for businesses.
Businesses are finding a variety of benefits in getting working capital from non-traditional sources:
- An easier, more streamlined application process
- A quick approval, often in 48 hours or less
- Quick funding—in as little as five working days
- Automatic repayment often based on the business’s cash flow or receivables
- No restrictions—funds can be used for any business expense
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