Why Working Capital Is Essential for Your Business

The term “working capital” refers to the amount of money your business has at its disposal to pay for immediate expenses. Technically speaking, your working capital ratio is the difference between your business’s current assets and your liabilities. Your assets include anything you own or can turn into cash within the coming year (like the money in your bank account, inventory, and accounts receivable) while liabilities include the costs and expenses you'll incur over this timeframe (including the cost of supplies you must buy to offer your services as well as payments on rent, utilities, interest, tax, and more).

Working capital is an important snapshot of your business health—specifically, your budget management skills and operational efficiency. A solid amount of working capital means that you can meet your short-term expenses and are well-positioned to capitalize on opportunities to grow. When your working capital is negative, however, it’s a signal to you that you are unlikely to be able to pay your expenses and need to cut costs, increase revenues, or seek capital from an outside source, like a loan or revenue advance.

That said, it's important to maintain a strong working capital figure beyond just avoiding insolvency. Here are a few reasons to ensure that you have sufficient working capital on hand as you operate—and grow—your business.

1. It allows you to take advantage of short-term opportunities

Opportunities to grow your business can arise unexpectedly—and generally require an upfront investment from you. Having additional access to working capital allows your company to take advantage of new opportunities as they arise. This can include things like purchasing inventory or hiring and training additional staff, both of which are short-term investments that require cash up front to realize the payoff.

2. It provides you with the security of a “cushion” for unexpected costs

After the last two years, it’s more apparent than ever that the economics of your business could shift at any time. Whether your industry is experiencing a slowdown, demand for your business decreases due to employee turnover, or a piece of equipment breaks down without notice, you should expect unexpected costs to arise. Ensuring you have additional working capital available in advance is a great way to create peace of mind in an ever-changing world.

3. It provides extra support to seasonal businesses

Fitness, spa, and salon businesses are highly seasonal, meaning that demand and expenses vary during different times of the year. This inconsistency can make budgeting especially difficult. Seasonal businesses often require access to a working capital buffer to pay for expenses in slower times—or invest in inventory and staff when business is booming. Having the foresight to secure additional working capital in a way that works with your business’s unique ebbs and flows is key. With the right strategy, you can take advantage of this knowledge and use it to your advantage.

Whether you’re eager to stay ahead of unexpected challenges or looking to leverage new opportunities, working capital is an important metric to measure. A healthy working capital ratio can help you run your business smoothly and efficiently—regardless of your individual goals.

Mindbody Capital is one way for qualified customers to access working capital based on sales history instead of relying on credit scores or other personal data. If you qualify, the funds are deposited into your bank account within 5 business days of accepting the offer—and they’re paid off based on a percentage of future sales.