5 And under: how young small businesses should manage their working capital

Reaching the fifth year of business is a huge milestone for any company. Once you hit that mark, you’re much more likely to have lasting success for years to come. So, how can you maximize your chances of reaching five years? Perhaps the most important factor is how well you manage your working capital.

Here’s everything small business owners need to know about utilizing working capital in those first few years.

Why Working Capital Matters

Working capital matters because it shows how well you’re managing your operational efficiency. Whether you’re applying for a loan or approaching investors, it’s wise to get a strong handle on your working capital numbers because they demonstrate how your assets stack up in comparison with your liabilities.

Determining Your Working Capital Needs

The amount of working capital you need depends a lot on the type of business you own. If you sell goods, then you’ll need to strike a balance between keeping enough inventory on hand to manage customer demand and having the cash flow to purchase new inventory in order to scale.

A younger business has less historical data to use to know how much to prepare for, so start off with conservative estimates to avoid overburdening your cash flow. You definitely don’t want to over-promise clients only to backtrack on your commitments and lose their loyalty moving forward.

For a company that provides services, you could get started with a small amount of working capital just to cover your technology needs, then ramp up your staffing as your services come in greater demand.

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How to Finance Your Working Capital

A working capital loan can be an effective tool for new small businesses as they gain footing and broaden their reach. While over time your goal is to grow profitable enough to invest some returns back into the business, that isn’t always feasible in the early years of a company.

For short-term cash needs, a working capital loan can help you meet your expenses while you wait for invoices to be paid. It can also help you fund large orders if your business has taken off more quickly than you anticipated. As long as the payments make sense for your budget, it can be a great resource for getting through the learning curve early on in your business management career.