How Much Working Capital Do You Need for Your Business?
As any small business owner knows, you need to have a sufficient amount of working capital in order to effectively carry out your company-related endeavors. By definition, working capital is the amount by which your assets exceed your liabilities. But how can you determine the amount of working capital your particular business needs?
For starters, the amount of working capital your business needs should be (at the very least) sufficient enough to pay your business expenses. Should you be thinking about a profit? If you are starting out, then you shouldn’t worry too much about profit just yet. It can take a few years to accumulate enough cash flow to surpass your basic payment needs. But you should, however, be thinking about how you will pay your immediate expenses.
Overall, you should determine what your fixed costs are (rent, utilities, payroll, taxes, etc.) then add at least 10-15% extra to cover any miscellaneous costs. It’s always good to give yourself a cushion because you never know when you might find yourself in a sticky situation.
Figuring out how much working capital you need also depends on whether your clients pay you immediately or if you offer a grace period. In that case, you need a greater amount of cash reserves to account for any delay in payment.
But if ever you do find yourself exceeding your limits, you don’t necessarily have to panic.
The OCM Financial Group helps small business owners obtain the cash flow they need when they need it. Think of our company as the other cushion that will break your fall when your liabilities exceed your assets. If you need working capital today, give us a call so we help you keep your business running effectively.