Growth is typically a sign that a business is doing something right, as it is succeeding in attracting clients, customers, and team members.
However, there can be some growing pains faced by businesses that may struggle to keep pace with their success.
Like Icarus, it can be tempting to fly close to the sun, but a lack of working capital has melted the wings of many aspiring businesses.
What is working capital?
Working capital is the difference between a company’s current assets and its current liabilities.
Your company’s assets include the things you would typically expect, such as cash and your inventory, but also include accounts receivable and customers’ unpaid bills.
Meanwhile, any outstanding debts or accounts payable are considered your liabilities.
When your current liabilities are deducted from your current assets, the resulting figure shows the liquidity and short-term financial health of your business.
Working capital is considered a good indicator of what financial resources are currently at your disposal.
Why does high growth affect working capital?
Growth can be quite intoxicating for business owners, but there is a danger of diminishing too much working capital.
To keep pace with growth, it is often necessary to invest in more stock, new team members, or sign onto long-term contracts.
This can result in a reduction in working capital as your liabilities increase.
If managed well, the eventual return on investment will cause your working capital to return to the equilibrium that allowed growth to happen in the first place.
Some business owners may find themselves relying more on overdrafts or delaying payments to ensure that they do not run out of money for employee expenses.
It is worth noting that a business having too high working capital is also not helpful, as it reveals an unwillingness to invest when the opportunity is there.
There is a healthy amount of working capital to have around, and that is the amount that will keep your business going if the market begins to shrink.
How to manage working capital during periods of growth?
The best way to manage your working capital is with financial forecasting.
This can enable you to invest as much as needed to benefit from the growth of your business without disrupting future growth.
You might need one more employee, but can you afford two or three more now if the accumulated expenses will eat into your working capital later?
Keeping your financial options open is also a wise thing to do.
Keep your eyes open for grants, schemes, and investors who could all help with your cash flow to keep your business healthy and growing.
Seeking professional advice is also a good way to check that you are managing your working capital most effectively.
Our team can help you understand when to invest and when to hold back so that you can keep your business growing long into the future.
