Working Capital For Startups: Why It’s Important
Are you an entrepreneur with a great idea or a startup company? If the answer is yes then this article is essential reading as we look in detail at the importance of working capital. Check out the article for more information or get in touch for a consultation on your requirements.
You can have the best business idea in the world but without sufficient working capital behind you, your startup will struggle. That’s the harsh reality of life for a new enterprise and so in this article we look in detail at working capital and why it’s so important.
What Is Working Capital?
In a nutshell working capital is the cash you need each month to cover your expenses. For a startup company working capital is even more important as it can take a while for revenue streams to come on board with sufficient money in the bank to meet your financial needs.
When it comes to working capital, the important starting point is to work out how much cash your business needs. So, how do you go about doing this? The way to work it out is to determine your production and overhead costs as well as what credit and assets you have available. Many businesses have a minimum of three months of working capital on hand at any one time.
Sources Of Working Capital
For a new company there are potentially three sources to support your working capital needs:
- personal savings – your own capital is the most obvious place to start. Investors will want to be assure you have some skin in the game.
- friends and family – may be willing to lend a hand by providing a cash injection to get you started.
- personal loan – this can be difficult though when you have no income or a low one as is often the case for a startup entrepreneur
- bank overdraft – often, however, this requires a personal guarantee
How To Reduce Your Working Capital Needs
When money is tight as it invariably is with a startup, finding ways to minimise your working capital requirements is essential. Here are some tips to get you started:
- Avoid numerous or large personal withdrawals. If you have any spare cash, make sure that your business doesn’t have a greater need for it.
- Try not to “overtrade”. Tempting though it may be to get the orders in, overcommitting yourself can lead to problems if your overheads increase and customers take longer to pay.
- Reduce your overheads. Ordering in bulk to take advantage of a volume discount and reduce your overheads may seem like a good idea but it will take up a big chunk of available cash and you could find yourself stuck with slow moving stock to get rid of.
- Make it easy for customers to pay you. Collecting money from customers as quickly and efficiently as possible is critical. Online payments are preferable to cheques and be sure to chase up unpaid invoices at the earliest opportunity.
- Develop a budget for your new business. It’s amazing how many budding entrepreneurs miss out this essential first step. Building an accurate budget will be hard without any historical data to go on, but every startup needs a financial roadmap that covers your anticipated income and expenditure. It will guide the operational side of things and gives you an idea of your break-even point.
Generate Accounting: Business Planning for Startups
If you’re a startup company or a potential entrepreneur that’s grappling with these issues, then get in touch with us here at Generate Accounting.
We have the knowledge, expertise and experience to set you on the right track so that your new business has the best possible start.