Working capital is necessary to keep your business going. But how much do you really need and where should it come from?
I’m asked this often and my answer may surprise you. It usually surprises the people that come to me for help, telling me they don’t have enough money to keep going, they aren’t even paying themselves, and they’ve used up every dime they could lay their hands on, begging, borrowing, (but not stealing) every bit of working capital to date.
Okay. I get it. And I can help.
First, let’s define “working capital.”
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. – Wikipedia
Wikipedia goes on to note, “A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.”
All true. However, when I talk about building your business, I’m not talking short or long term debt or major operating expenses. What I believe (and teach) is creating a business fast and easy, and supports you.
Digging deep into your pocket for working capital to pay for a business that isn’t working is not what you should be doing (or considering). Invest in your business, of course. But don’t let it bankrupt you or keep you on the brink of financial ruin. Invest only to grow and expand.
Don’t throw good money after bad.
If your business isn’t working, or doing well enough to pay for itself AND you, it’s time to rethink it. Most likely you need to reinvent it. You definitely have to fix it!
Don’t throw in the towel!
You’ve sacrificed to get your business started. You’ve sunk money into it, possibly given up some other source of income, and put your time and effort into it. Giving up isn’t the answer. Ferreting out the problems, and solving them, is the right answer.
Your business needs to bring in enough money so the working capital doesn’t come out of your pocket. It comes from the business itself — in addition to paying you. Look at your pricing. Look at your costs.
Understand this: Your passion for your business isn’t contagious. You have to market, market, market, sell, sell, sell. Take a close look at everything you’re doing and the results you’re getting. What’s happening?
How’s your marketing doing? You are marketing, right? There are many ways to market that include low cost and no cost methods.
What is your target market saying? Are you listening to them? Have you even found them? You have to talk to them. They are in your community and on social networking sites and forums. Are you there, too?
What is the biggest thing you think you need to invest in and why? Think it through. Is there any way around that expense? Is there any way to bring in more cash to pay for it?
When your business isn’t supplying its own working capital, and supporting you, rethink everything without giving up. If nothing else, you’re halfway there! You have a business.
Fix it. Make it work.