6 Ways to Use Working Capital to Grow Your Business
How to use working capital to take your business to the next level
In this guide, we’ll cover six ways working capital can be used to grow small businesses in every industry. From managing cash flow gaps to hiring costs to expanding your business, the sky’s the limit with additional funds.
All businesses, no matter the size or the lifespan, seek additional funding at some point. Choosing from the options available can be confusing or intimidating, but with the right amount of research you, too, can take the leap for your business. With a strategic plan in place, you can make your funds work to grow and manage your business. For example, let’s say you’re a restaurateur and now want to expand your offerings to a food truck. You’d start by researching costs, creating a budget, mapping out a hiring and marketing plan (and a driving route) and more. Your business funds could help you execute each part of the plan without blowing your budget. In this guide, we’ll cover six ways working capital can be used to grow small businesses in every industry. From managing cash flow gaps to hiring costs to expanding your business, the sky’s the limit with additional funds.
Managing Cash Flow Gaps
Cash flow challenges are one of the leading reasons small businesses close, so successful financial management should be a high priority. Cash flow gaps affect your ability to pay bills, order inventory, pay new hires and other aspects of running your business. Reasons for cash flow gaps vary by industry, including seasonal fluctuations, ordering too much inventory, late payments from clients, overpaying vendors, or dealing with constant equipment maintenance. When profits are absorbed by these challenges, cash flow dries up. With more working capital, you’ll have access to funds when you need them to cover operational costs (expected or not). CASE STUDY: Ted Dellas understands the fluctuations of seasonality. His business, LeisureTime Warehouse, sells and installs pools, hot tubs and saunas, seeing its seasonal high in May and through the summer. When he needed help covering the slower, winter months, he didn’t want to turn to traditional lenders. With working capital from Kabbage, Ted got the peace of mind he needed to cover operational costs at the end of the year. His business has grown to $4 million in sales and 15 employees. A longer cash flow cycle hurts your cash flow. By buying smaller increments of inventory, hiring staff during busy seasons or requiring payments for orders up-front, small businesses can improve their own cycle.
Purchasing inventory isn’t a new concept to business owners, especially those in the e-commerce and traditional retail industries. Many need to keep a large amount of inventory on hand to keep operations running smoothly but costs, demand, and revenue can make it challenging. Additional capital can alleviate the challenges of purchasing inventory. You’ll be able to keep up with customer demand, prepare for your peak season, take advantage of potential wholesale deals and separate yourself from the competition by offering unique products or services.might not be following you.
Investing in Equipment
If a vital piece of equipment breaks down and needs replacement, businesses might not always be prepared. Equipment comes at a high cost, which can be intimidating, but neglecting the need for it can hinder potential future revenue. With working capital, you can upgrade, replace or purchase the equipment you need to run operations as smoothly as possible. If purchasing equipment is still too daunting, consider leasing equipment for lower initial expenses and easier upgrades. Section 179*, small business owners can deduct the full value of certain equipment purchases (new or used) up to $1,000,000. This does not apply to leased equipment.
Hiring New Talent
Hiring is essential for any growing business, large or small. Ineffective hires and employee turnover can potentially cost your business 30 percent of its yearly earnings, according to the U.S. Department of Labor. Instead of bargain shopping for employees, use additional funds to invest in the right hiring platforms, post multiple job listings, manage payroll and cover onboarding and training costs. You could also use funds to give current employees a bonus for referring talent, or simply to help retain them.
Expanding Your Business
Expanding your business doesn’t have to be a pipe dream. In fact, 59 percent of those applying for business funds do so in the hopes of expanding their business or taking on additional opportunities. Expansion is more than just opening a second location. It can mean offering more products and services, improving your website or even expanding to a new customer base. As you grow your business, increased revenue could help manage cash flow, improve profits, acquire new customers, hire new talent or improve your business’s credit score. With working capital, you can alleviate some of the costs that come with expansion with ease and flexibility. When expanding your business, make sure to test the location, products and services you want to offer to be sure they’re in demand.
Covering Unexpected Costs
Even if you’re the savviest business owner in the world, unexpected events always occur. Perhaps unpredictable weather shuts down business for a few weeks, a piece of equipment breaks down, a top employee quits, a customer walks away from a contract, or another unanticipated problem arises. No matter what, how you manage these issues can determine the success and longevity of your business. Planning ahead for emergencies is always a smart move, and that plan should include additional capital for the expenses while your business recovers. There’s no better peace of mind for your business than some extra funds in your back pocket. Create a business emergency preparedness plan to minimize the damage and costs to your business.