APPROPRIATE SOURCE OF WORKING CAPITAL 1: Equity or Debt?
Working Capital funds the cost of the labor & materials that go into the goods you sell (or the services you render) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses).
After you are convinced that you have a marketable product or service and there is an accessible market sufficient to meet your profit objectives, you have to determine how much money you need to put up for the business. Oftentimes, the focus is on the fixed assets; e.g., office improvement, production & office equipment, furniture, etc. Not enough attention is paid to the Working Capital, i.e., what you need to actually operate.
The prudent small business move is to fund your fixed assets from Equity. For Working Capital, should you put up more Equity? Or, should you borrow?
Robert of a2nmedia.com has this to say:
” . . . I may over-simplify things to an extreme, but it has ALWAYS worked for me to utilize on-hand assets for leverage whenever possible to offset the need for increased capital. For example, if my company owns warehouse space that I’m not using, then I may rent out a portion to grab some monthly revenue that will keep me from going as deep into debt.
Debt, in my experience, can be a powerful resource for obtaining capital, but as a rule, I tend to try to stay away from it whenever possible. Save the credit limit for a rainy day and all that!”
image from Microsoft Clipart
Tags: small businesses, Success Accounting, sustainable cycle of debt, working capitalRelated Stories
POSTED IN: Accounting Concepts, Accounting for NonAccountants, Balance Sheets, Best Business Practices, Equity / Capital, Liabilities, Small Business Finance, Success Accounting
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