working capital in layman's terms - why is it so important?
working capital. i read about it in business school. but now i live and breathe it and understand it intimately. having enough working capital is one of the biggest challenges we face as a company.
it works like this: we buy raw materials in bulk, more than we need for a production run, which ties up a lot of cash. trust me, a container load of quinoa is not cheap! and it’s not just ingredients, it’s corrugate boxes and packages for each flavor too. then we make the product, a slow process as it’s all done by hand, after which the product lives in our warehouse, sometimes up to a month, waiting for a po to come to give it a home. at this point, i haven’t sold any product yet, but i have to pay the bills for raw materials and labor. even once distributors and stores order from us, they don’t have to pay until 30 days after they receive the product. and trust me, no one pays in 30 days, no one. so the short story is that i pay out much sooner than i get paid, and since we are growing fast, those payouts are getting bigger, quickly.
here are a few ways you can work to manage the challenge of working capital, from least expensive to most:
1. grow slowly. if you manage the size and frequency of orders so that they’re not growing too fast, you can get into a nice cadence where one order funds the next. not too likely if you want to grow though.
2. get a line of credit with the bank. this can be tough to do when you’re a small business with little credit history. but if you’re willing to personally guarantee the loan and you have some assets, the banks might be interested.
3. factoring. when you get a po you can sell it to a company that does factoring. if your po is $1,000, they’ll give you $900 cash right away, and you can use the money to buy ingredients and make the product. when the customer pays the bill it mails straight to the factoring company.
4. sell equity. get investors that are willing to give you money in exchange for some ownership in the company. the great part is that you typically don’t have to pay the money back for a long period of time. the downside is that you are no longer the only one running the show.
- sarah (photo by ravi)