How Does Working Capital Benefit Seasonal Fluctuations?

Working capital is the requirement of all businesses in order to finance everyday operational costs and short-term debt repayments. Businesses usually generate working capital via steady cash stream which is a combination of sales income and accounts receivable. Working capital is basically the difference between a business’s current assets and current liabilities. According to studies, however, this formula is not so simple when we add in seasonality effects.

The working capital your business needs, depends on the kind of business you run as well as on seasonal fluctuations. The type of business you own dictates how much working capital you need and at what times of the year. If your business is completely seasonal, such as growing and selling Christmas trees, your working capital needs would be different. Alternatively, if you run a year-round business such as a clothing store, the working capital your business requires would be different. So how exactly does working capital benefit seasonal fluctuations? Read on to find out.

Fund Low-Income Periods

One of the most practical benefits of working capital finance is to cover daily expenses in low-income season. It is easy to generate revenue for daily operation expenses in the months when business is earning revenue daily. However, it is harder to keep it running during the slower months of the year when sales are not good. Businesses need to prepare themselves for such times by figuring out their working capital needs and sources in advance. It also helps to be ready to tackle any unexpected working capital requirements arising from an unprecedented spike in sales.

Buy Inventory for Busy Season

Businesses can take advantage of working capital to fund inventory purchase during the slow season. Doing so helps the company prepare itself for the high-sales time period. You might lose sales opportunities if you purchase inventory in the peak season, as it may take time to arrive. By procuring supplies in advance, you get to make a head-start on production for the busy time ahead.

It is not uncommon for businesses to opt for working capital loans to finance their purchasing in low-income months. Doing this lets you prepare for the peak season and you can pay back the loan when your earnings increase. When you borrow money to raise working capital, they usually come at shorter repayment terms so you can repay them quickly. Businesses are usually able to repay such loans during peak season when revenues are high.

Finance Employee Requirements

Although peak sales generally indicate a good period for any business, you would need more employees during busy season. Alternatively, you may decide to increase the working hours of your present employees. In any case, you need to distribute the salaries of new employees or the increased salaries of your current workers. Working capital also helps you pay extra salaries so that your business can keep functioning smoothly. You might also discover that you need to train your sales force for the peak season. You can finance your employees’ training through working capital as well.

Helps Balance Investments

Working capital funding helps business owners balance their investments during seasonal fluctuations. If you have been in business for some time, you would know your busy and slow seasons. Research indicates that you wouldn’t make any major capital investments or repairs in the slow season. Working capital would, however, finance interest payment due in the low-income season on any loan that you have taken. You don’t have to worry about missing any interest payment on any long-term loan. In this way, working capital financing keeps your business afloat and your lenders happy the whole year round.

Doesn’t Effect Credit Rating

In case you need to borrow working capital for an emergency during seasonal fluctuations, it wouldn’t change your credit score. According to studies, businesses can fall behind repayment of their loans when they face difficult times, thus adversely affecting their credit rating. Lenders might hesitate in giving loans and may charge higher lending rates to businesses with bad credit scores. Working capital financing has no such negative effects on your credit rating. So you don’t need to worry about its future repercussions for your business.

Supports Business Growth

Working capital financing helps you grow your business and keep your products updated according to customer demand during peak season. For instance, there may be a new trending product and customers are demanding you add it to your stock. Working capital can help you procure highly-demanded products quickly, thus ensuring that you don’t lose revenue to competitors. You can also use working capital to fund your marketing and sales effort in the time leading to peak season. You might need funds to order marketing supplies such as banners, pamphlets, or paid social media marketing campaigns. Working capital comes in handy for all such situations so you can easily finance the tools to promote your business.

Freedom of Use

If you take a loan to raise working capital for your business, you can use it for various purposes. Lenders don’t restrict you to use the money on a specific area of your business. You can use the working capital to finance any area of business that needs improvement. This area can be anything from equipment repair, to employee hiring, to adding new products. You are free to figure out which areas need working capital the most and use it on that. You don’t need to explain the details of the use of the loan to the lenders.

Final Word

Business owners need to manage their working capital smartly and effectively to cover both the peak and slow seasons. It is easy to go on and splurge money on unnecessary expenses when the earnings are good. However, you should keep those months in mind when the revenue isn’t that high and plan accordingly. A successful business owner plans for seasonal fluctuations and secures working capital to keep the business afloat around the year.