SMALL BUSINESSES: How to determine Working Capital that will work 1

After you have determined that you have a marketable product or service and there is an accessible market sufficient to meet your profit objectives, you want to know how much money you need to put up for the business (Equity). Oftentimes, the focus is on the fixed assets; e.g., office improvement, production & office equipment, furniture, etc. Not enough attention is paid to the Working Capital, i.e., what you need to actually operate.

If you do not put up enough money for Working Capital, you will be forced to incur debt or inordinately prolong accounts payable so that you get into trouble with your suppliers.

Not having adequate Working Capital will place your business in an unsustainable cycle of debt.

You will borrow to finance your Cost of Goods Sold and Operating Expenses. The interest expense will bloat your Operating Expenses. You will have to borrow more to be able to pay your suppliers (Cost of Goods Sold), pay salaries (Operating Expenses), and interest. You will get to a point where you will be borrowing to pay for loans that are in arrears. Pretty soon, you will no longer be able to borrow and your suppliers will no longer be willing to provide the materials you need to sell.

Where before you were able to get clean loans, you will end up having to put up sufficient collateral: house, car, etc. At the end of the day, you may lose not only your potentially profitable business, but your other assets as well.

How do you determine the Working Capital that will work?

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