It is not a new thing to say that working capital is fuel to your business. When you have positive working capital, you will have access to funds immediately to meet your business operations. Working capital is a liquid asset or non-liquid that you can convert into cash quickly.
Most of the capital of the business remains blocked, which you cannot use when you need money to run your business smoothly. For instance, you cannot sell out your office space to invest in a new business project that has higher profit projections.
Therefore, it is crucial to have particular money to be readily available so you do not run out of money when you need it. Working capital is the difference between current assets and current liabilities.
When current assets are more significant than current liabilities, working capital is positive and negative when current liabilities are greater than current assets. Of course, it is a red flag when you have negative working capital.
Working capital is linked to cash flow systems. When cash flow is healthy, your working capital will be positive. However, if you are an online retailer, you might struggle to have a positive cash flow.
Why positive working capital is important for online retailers
Not to mention, working capital is imperative for your business. You may not be able to hit the ground running if your cash flow systems are not healthy at all. Even in the case of higher sales, you cannot be sure to have enough working capital as not all business expenses are fixed in nature.
A lot of expenses keenly wait to burn a big hole in your pocket every month, whether your sales are impressive and flat, like your employees’ salaries, payments to suppliers, and other bills. You must have sufficient cash reservoir to meet them. Otherwise, your business will suffer from the operations.
As an online retailer, you may find it to have enough working capital for your business as most of the money remains tied up in non-liquid assets.
When you have positive working capital, you will be able to meet your business expenses smoothly. In fact, when you need extra funding to spend on a new propitious business project, you will need a high amount of working capital.
As an online retailer, you will need working capital to:
- Buy inventory
- Pay regular overheads
- Deal with sudden emergencies
- Grab a new business opportunity
What expenses should you not meet with working capital?
It is argued that working capital should not be used against recurring expenses. They should instead be met from your monthly sales. Well, this is true but to some extent. It is not possible that you will be able to make sufficient sales to cover your recurring expenses.
Therefore, it is vital to have a budget for larger expenses like payroll and utilities. If you have working capital, you will be able to meet these overheads even if your sales went flat the previous month.
However, it does not mean that you will hinge on it to cover all of your business expenses. Here are a few expenses that you must avoid funding with working capital:
- Buying office premises
- Buying or renting a warehouse space
- Buying expensive equipment
You should consider other financing sources to meet these expenses. Working capital loans in the UK can fund your cash flow, but you will need a long-term business loan to meet these expenses.
What should you do while a lack of enough working capital?
Your business may grind to a halt when working capital is poor. You will have to consult a trade finance loan company which helps fund working capital. However, there are various other financing options that you may need to opt for because working capital loans may not fulfil your requirements.
They are generally ideal for cash flow gaps. But otherwise, whether or not you need money for short or long-term needs, you will need other financing options such as a small business loan, raising capital from investors, and selling your business assets.
Tips for managing working capital as an online retailer
Here are the ways to ensure smooth working capital for your online retailing business:
Manage inventory
Inventory is the biggest culprit to have poor cash flows. Of course, you would try to have the inventory in advance so you do not struggle to deliver when an order is placed, but a rule of thumb says that you should have neither excessive nor insufficient stocks.
Order items in bulk based on the estimated demand. You can increase the levels as you notice the demand is up and the inventory is going to be all cleared. Try to get inventory at lower prices. Leverage your relationship.
Get receivables cleared on time
You will struggle with cash flow systems if the receivables are not paid. Make sure you get invoices cleared as soon as possible. You must have been able to get money from your debtors before you have to pay your vendors.
Your suppliers would want you to maintain strict discipline when it comes to payments. You should send polite reminders to your debtors and offer incentives to encourage them to pay before the due date. Impose penalties on those if they fail to pay off the due date.
Pay your suppliers on time
Discipline is a must to maintain when it comes to building a healthy relationship with your creditors. If you keep paying money on time, you will be in a position to ask for some benefits. For instance, you can ask them to give you an attractive discount on supplies.
In fact, you can also get better payment plans. It will work to your advantage if you are to pay after you receive money from your debtors, and it is even better if you do not have to pay the whole of the money outright.
The bottom line
Woking capital challenges are very common in all types of businesses. If you are an online retailer, you need to be very careful about the working capital. You can quickly meet your business operations when you have positive working capital.
But if that is not the case, you will have to look for better funding alternatives. It is easy to finance a gap in your working capital, but it can prove to be very expensive. Do not forget that you are to pay interest on top of the borrowed money.
Seek alternatives like invoice factoring when you need immediate cash and do not have sufficient working capital. Although you can access funds when working capital is not sufficient, it does not mean that you will not find ways to do it.
Try to get money from your debtors on time. Shorten the billing cycle. Offer discounts in order to get them paid on time. Make sure you pay your vendors on time as well.
