Working capital finance for SMME’s is vitally important as it the amount of money a business needs to meet its everyday financial obligations and operate successfully. It is the amount the owner needs to pay suppliers, employees, take care of maintenance costs, buy in stock, and pay overheads.
For SMME’s, working capital is used to fund operations and meet short-term obligations. If a company has enough working capital, it can continue to pay its employees and suppliers and meet other obligations, namely interest payments and taxes, even if it runs into cash flow challenges. Working capital can also be used to fund business growth without incurring debt.
For finance teams, the goal is twofold; have a clear view of how much cash is on hand at any given time, and work with the business to maintain sufficient working capital to cover liabilities, including some leeway for growth and contingencies.
Working capital is current assets minus current liabilities. Anything in the business that can be converted into cash within a year is a current asset. Anything that is due within a year is a current liability. These can be found in the business balance sheet. Current liabilities include any bills that have not been paid as yet and current assets include namely; current inventory of stock, account receivables (debtors), and cash-at-bank.
Importance of Working capital finance for SMME’s
Many businesses fail within their first year of trading because they have not allowed for variations in their working capital. It is important for business owners to think about how they are financing their day-to-day operations and to keep a tight rein on understanding how much working capital they have on hand.
The right amount of working capital will help the business grow, whereas insufficient working capital will impinge on the period of time one can handle between paying suppliers and getting money from customers.
Working capital may increase by:
•The business working efficiently;
•Selling long term assets (if held by the business);
• Borrowing (long-term); and
• Making a personal investment into the business.
Working capital can decrease from:
• Business operations that are not profitable;
• Purchasing long-term assets with long-term financing;
• Settling long-term debts; and
• Taking cash out of the business.
To investors, well-managed levels of working capital is a good measure of a small business’s potential and success. Any signs of strain on working capital are a warning that if market conditions were not to be unfavourable and sales went down a business might not be able to meet its financial liabilities.
Working capital Components
• Trade Receivables;
• Inventory;
• Cash & Bank Balances; and
• Trade Payables.
Advantages of Working Capital for SMME’s
Working capital can help smooth out fluctuations in revenue. Many businesses experience some seasonality in sales. With adequate working capital, a company can make extra purchases from suppliers to prepare for busy months while meeting its financial obligations during periods where it generates less revenue.
Dream Team Capital has extensive experience and liaisons with funders for SMME’s.
For more information and assistance – contact the DTC Team today!