Every business needs money to function. Some businesses need more money than others, but everyone needs some kind of cash flow to start with and then to draw on as they carry on in their business development efforts. Working capital is a form of capital (cash or assets) that help you buy the things you need, rent the spaces you work, and pay your employees to work for you. At some point in your business operation, you’ll need to tap into a nest egg of working capital, whether to make it through a difficult profit period or to manage until you have regular, recurring income you can count on. When you have money at your disposal, it’s important to manage your expectations and how you use it – capital isn’t the answer to every problem your business has so educate yourself on your options before you dig into that fund to carry you through.
Identify the Problem and How Money Can Help
Before you use your working capital for day-to-day operations, especially if you need to take out a working capital loan, make sure that money is going to be the solution to whatever the problem is. Many business owners think that if they just hire more employees that their operation will improve, but if you have trouble managing the employees you already employ, it will only become more difficult as you scale up. If you need to find more time in your business for things like fulfilling orders, more hands-on deck will help with that problem. A clear indication of what is wrong will help you make decisions about how to throw money at the situation to improve it.
Figure Out a Timeline
When using your working capital, especially if it’s loan-based, you should set a timeline for your business to get back on its feet and stop relying on the nest egg you’ve created. In some cases, businesses will go to economic development agencies to get micro-loans or investment groups to get money to keep operating, but if you are just living “paycheck to paycheck” in your business on loans, it might be time to consider if that is the best approach or if it’s time to pivot and go in a different direction. Giving yourself a timeline to change the financial outlook of your business will help you know when to call time of death on an idea and when to keep going.
Set a Spending Limit
Even if you get a working capital loan for a million dollars, there’s no need to plan to spend all of it. If you just blow through that money, you’ll end up right where you were before: looking for more money. When it comes to managing your expectations of working capital, you need to remember that 100% of your operations budget comes from your revenue. You can run a business for years without making a profit, but if you don’t have enough revenue to sustain your operations, you’ll need to consider if it’s even worth taking a loan or changing directions. Setting a spending limit is another way to help you stop and think about the way you are using your working capital so you can make good choices about what parts of your business needs money and what parts can do without for some time.
Take Stock of Your Operation
Before you dig into your working capital to get yourself out of a bind, take the time to determine what areas of your business can be scaled back and what areas need to be attended to in order to continue functioning. A working capital loan shouldn’t be used as a Band-aid solution to your revenue problems. Yes, you can use it to pay workers and bills, but it won’t help your business grow. On its own, a working capital loan or investment fund isn’t the answer to your long-term growth options. It can help you bridge the gap between where you are and where you want to be if you plan to scale your business, and it can help you carry the burden while your business is upended during a difficult time. Just set some rules for yourself, be careful how you spend it, and give yourself a timeline to get back on your own two feet. This will save you a lot of disappointment in the future and keep your expectations aligned with your actions now.