Discover Why Working Capital Is Important

Discover Why Working Capital Is Important

As a business in any industry, you know that working capital is critical to your success. But when you are earning well on paper, it may be easy to forget that there’s a big difference between cash that’s owed to you and cash in the bank.

Why is working capital important?

Before we explore the answer to this question, it’s important to understand working capital. This is calculated as your current assets minus your current liabilities. These assets include cash, accounts receivable, inventory and other resources that can be converted into cash.

Is the bulk of your working capital tied up in your invoices?

Even if you’re sure that your customers will pay, waiting for even 30 days for this cash to flow into your business could put you in a tricky position. What if an unexpected bill arrives or you get an opportunity to increase your sales, but can’t afford to buy enough stock?

Why is working capital important when it’s in your business? Here are just three of the top reasons:

1. Increased agility

Without access to funds, you’re in a vulnerable cash flow position. This can lead to a breakdown in supplier relationships, reduced production rates and a poor credit score. With working capital available, however, you are free to respond to new market demands. You can buy new equipment, increase stock, invest in technology, improve quality, appoint new members of staff or even take on larger client contracts that are out of reach to competitors with cash flow restrictions.

2. Negotiating is easier

Having surplus cash in hand places you in a good position to negotiate more attractive deals, settlements and bulk purchase discounts with your suppliers, as well as reduce associated purchasing costs.

3. You’re more appealing to customers

Why is working capital important? A healthy operating budget frees your business to compete more effectively in the market by offering more attractive trading terms to clients, such as extended credit sales terms or discounted prices on bulk orders. This not only strengthens your relationships with existing clients but also gives you an edge over competitors who can’t offer similar terms.

Why unlock your working capital through invoice factoring?

Factoring is a type of business finance that allows you to draw working capital back into your business before your customers pay your invoices. For example, Merchant Factors is an independent factoring company that pays you up to 75% of the value of these invoices. They then deal directly with your customers, collecting payments in line with your agreed credit sales terms. The balance will be settled as soon as your customers pay in full, minus an agreed admin fee.

One of the key benefits of factoring is that it is not based on the value of bricks and mortar. In a fast-growing business, the cash requirement is likely to be high and companies need access to finance that has the flexibility to accommodate this growth. If not, even a successful operation could experience a cash flow crisis. With factoring, you have access to a working capital facility limit that matches the turnover growth of your business. After all, factoring is not a loan. It’s your money.

Added value

Most reputable factoring firms also handle debtor administration and credit control on your behalf. Many companies don’t have the human capital available to keep a tight rein on their invoicing, debtors and accounts. With your factoring company taking care of this key function professionally, you’re free to focus on core business.

Merchant Factors acts as your accounts and credit control department. This can save hours of your valuable time. The expert team handles everything from opening new debtors' accounts and performing deep credit checks, to handling payments and more. All these services are carried out in close consultation with you as part of the factoring agreement.