Growth capital and working capital can be simplified as long term and short term cash. Each has its own strategies for obtaining and sustaining, and each is important for the health of a business. Business capital is necessary to pay vendors and employees as well as investing in tangible assets that stimulate growth.
It’s not unusual for fast-growing businesses to run into issues with cash flow and find it difficult obtaining capital. Business capital is mainly available in two forms: debt and equity. For a fresh company experiencing rapid scaling, equity is often a popular option, but most small business owners prefer debt for the ability to maintain complete control of their operations.
Understanding working and growth capital is important because it helps entrepreneurs prepare their business for market shifts and demand fluctuations.
You can define WC as assets. Cash is the biggest asset companies use as WC. However, not all assets are WC; whether an asset is considered WC is defined by its ability to be used as a payment currency for your daily expenses. Real estate and equipment are assets but not necessarily working capital. Cash, inventory, prepaid expenses, debtors, and current liabilities are working capital assets.
Working capital can be divided into two categories: gross working capital (the sum of a company’s total financial resources, or assets); and net working capital. If you take your current assets (CA), then subtract your current liabilities (CL), what’s left is essentially your working capital (WC).
WC = CA – CL
Liquid Assets Keep Your Business from Drowning
Liquid assets are essential to running your business. More liquidity means a more agile and responsive business. That’s why understanding your working to growth capital ratio is so important. You don’t want to have idle liquid capital that you’re not using; it’s a missed opportunity for growth and investment.
The key to having both growth and working capital is finding a balance that works for your business, starting with understanding the business cycle.
Within its own operations, a business has its own business cycle of how long it takes inventory to be processed and sold, and how long it takes to be paid by vendors. The entire process from start to finish.
The business cycle of economic growth and decline happens repeatedly over time. Each business cycle has four phases of expansion, peak, contraction, and trough. The expansion phase is when small businesses push for growth and it’s the time when growth capital is easiest to build or acquire from an outside source.
Maintaining a healthy level of working and growth capital is essential to keeping your business secure. While waiting for invoices to be paid, you can draw from your net profits or savings to cover your extraneous expenses.
Another option is seeking external financing. This is key for businesses with short business cycles, such as seasonal peaks, unexpected peaks, growth opportunities, or another reason.
In summary, GC is cash specifically allocated for growth and indicates a company’s long-term growth potential. WC is a measure of a business’ operating efficiency and short-term financial health. Both are essential for sustaining a healthy business.