What’s heard in the news is that cash flow problems can destroy businesses. An Entrepreneur article quoted a study that found: “Cash flow problems can kill businesses that might otherwise survive, with 82 percent of business failures caused by poor cash management.” An Inc. article noted that poor cash flow management is causing more business failures today than ever. What’s not discussed nearly as often is the fact that businesses don’t need to be going through hardships to need working capital. Oftentimes, businesses need capital to take the business to its next level, but in either case, having working capital can come in handy.
Working Capital in Staffing It costs businesses about one-fifth of a worker’s salary to replace a worker, reports the Center for American Progress. There are productivity losses, hiring and training that equal the cost of staffing. In addition, budgeting to pay employees’ bi-weekly or weekly (depending on how often staff gets paid) salaries and benefits is essential. There are also expansion costs: as businesses grow and need more manpower, a hiring shift that needs to be funded occurs.
Working Capital in Equipment Depending on the type of machine, maintenance and quality, computers can last as little as three years or as many as eight, reports Techwalla. Having working capital could come in handy when a computer breaks down or a company has other unplanned technology malfunctions, such as a printer needing repair or a refrigerator needing an unexpected replacement. A business that works in the restaurant industry, for example, takes a huge hit in profits if its stove suddenly breaks and it doesn’t have the funds to repair it quickly. In addition, with expansion comes the need for new workstations.
Working Capital in Operations When it comes to everyday operations, there’s inventory, rent (or mortgage), utilities, printing, phone support, marketing and more. There have been a ton of businesses on the NBC show “Shark Tank” that go into the tank looking for a partner to fund purchase orders. In the real world, it happens all the time: A business will get a large purchase order request, but it doesn’t have the funds to fulfill the order. What does a business do in a case like this? It is likely to run to its local bank, attempt to get the funding right away, and when it can’t, they will end up losing money.
Another instance in which this occurs is with large funding requests. Banks are only able to fund businesses with a certain amount of cash based on the assets they possess; when that amount is capped out in cases like this, businesses still need additional funding to take their business to the next level. They run into a bind, and a cash advance can become beneficial. Companies that offer cash advances (such as Priority Payments Local) give out funds based on the strength of said businesses and the risk associated with them.