Working capital is an important part of any business strategy. Whether it is an established or a start-up business, without enough working capital neither will survive for long.
Working capital is essentially the amount of money that any business needs to take care of day-to-day operation costs.
If there is a lack of working capital, you will find it difficult to manage a smooth running of your business. If it is a manufacturing unit, you will need a large working capital to purchase raw materials, pay wages, salaries, and other overhead daily expenses. For a start-up business, you need to have enough working capital to reach a break-even point.
When you are making timely payments to your creditors, it helps in creating your goodwill in the market. Goodwill is very crucial for any business to get external financial help when needed.
The lenders like to deal with businesses, which are solvent. Lack of enough working capital leaves a negative impact on the business. It becomes hard to borrow from the market. Oftentimes, a business with low liquidity or paying capacity has to pay higher rate of interests on borrowings.
Compared to an established business, it is hard for a start-up business to have an access to external financial assistance. It does not have the goodwill or credit merit, which needs time to build.
Hence, it becomes more important to have a working capital so that the business keeps running until it reaches a favorable stage. Once the business has enough goodwill, it will open doors to facilitate borrowings easily on reasonable terms.
The level of required working capital depends on the type of industry. If you are into providing services, you will not need a large working capital because you do not have to procure any raw materials, as you would have to if you were in a manufacturing business.
Having the support of adequate working capital will keep your business on a steady growth path.
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