Every small or big business needs money to operate and grow. This money is called capital. But when exactly does a company need more capital? Is it when things are going well and the business is growing? Or is it when the business is facing challenges and struggles?
In our view, businesses need more capital when they have opportunities to grow and expand.
Even if a small business is profitable, expanding to the next level almost always requires spending money upfront before seeing higher profits later. Opening new locations, buying equipment, developing new products, ramping up marketing—all these growth initiatives require capital investments initially. Revenues from current operations may not cover these higher expansion costs, so businesses need an extra capital injection from loans, investors, or other sources.
On the other hand, if a business faces operational issues like supply chain troubles or cashflow problems, the capital needs are likely smaller and focused on resolving those particular problems to get back on track. But when business owners see great opportunities to increase profits by growing bigger, they need an influx of capital.
Read further to learn more about when do business needs capital.
Expand Operations
Expansion can mean anything from increasing the product line, adding new services, scaling up production capacity, or opening new branches in different locations. Each step towards growth necessitates an upfront investment in new equipment, marketing efforts, and securing more space.
One expansion expense is finding and maintaining the right space to accommodate growth. Traditional options usually involve leasing or purchasing fixed office spaces, which can be capital-intensive. These spaces often come with long-term commitments and additional costs, including maintenance, utilities, and office furnishings, which can quickly eat into a business’s capital reserves.
Instead of locking funds into fixed offices, an increasingly popular strategy is to invest in coworking spaces. Coworking spaces like WorkspaceCo. offers businesses the flexibility to scale up (or down) depending on their current needs without the hefty price tag and long-term commitments.
This choice frees up capital better spent on other growth-driving activities, such as product development, market expansion, and talent acquisition. Coworking spaces also come with added benefits like networking opportunities, access to a community of like-minded professionals, and, often, amenities and services that would be cost-prohibitive for a single business to procure independently.
Improve Cash Flow Position
Even profitable businesses can face temporary cash flow issues when there is a mismatch between the cash going out to pay expenses/bills (accounts payable) and the cash coming in from sales (accounts receivable).
For example, a business may have to pay suppliers and employees weekly or monthly. However, its customers may take 30-60 days or longer to pay their invoices after receiving the goods/services. This creates a cash flow gap where money goes out faster than it is coming in.
Access to capital provides a buffer that allows the business to cover these gaps and delays in receivables. The capital essentially bridges the timing difference between payables and receivables and prevents cash flow crunches.
Without this capital buffer, the business may not have enough cash to meet its payroll, pay rent/utilities, restock inventory, or cover other obligations when they are due. This cash flow crunch can disrupt operations and put the business at risk of missed payments, penalties, asset seizures or even bankruptcy.
The business avoids these disruptive cash flow gaps by maintaining a cash reserve or having a line of credit from capital sources. Using capital, it can continue paying its bills on time while waiting to collect receivables from customers later and keep operations running smoothly.
Hire and Retain Talented Employees
For startups and growing businesses looking to build their initial team or expand headcount, capital is needed to afford the salaries and compensation packages. Top talent expects competitive pay and benefits like health insurance, retirement plans, paid time off, etc.
Established businesses can use capital to retain talented employees through incentives such as performance bonuses, stock options, training/development programs, and workplace perks. These costs demonstrate the company’s value to its workforce.
Moreover, businesses may need capital to afford specialized roles like experienced executives, technical experts, or other skilled professionals, which can be particularly costly to hire yet vital for strategic initiatives. As a company scales, capital facilitates hiring across functions – engineering, marketing, operations, etc.
Salaries and payroll are typically among the biggest expenses for labor-intensive businesses, such as professional services, tech, consulting, etc. Adequate capital allows companies to afford top industry talent without being severely constrained.
Invest In Research and Development
Businesses often need to invest in developing brand-new products or services. But, creating a new offering requires a lot of money upfront before it can make any money.
First, the initial idea has costs—paying designers, researchers, and experts to conceptualize and plan the new product or service. Then, businesses have to spend money on making early prototypes and models to test the concept.
Once they have an initial design, there’s more money required for things like:
- Buying specialized equipment and tools for further R&D
- Hiring technical staff to keep researching and fine-tuning
- Running trials and getting consumer feedback
- Securing patents and legal protection
Finally, after all that upfront R&D investment, capital is still needed to build manufacturing or service capabilities to commercialize and launch the new offering.
Researching, developing, and launching a brand-new product is extremely capital-intensive. Most successful businesses can’t fully fund this kind of major R&D from their regular operating profits.
That’s why they must raise additional capital from investors, loans, government grants, and other sources. This extra capital allows them to make big upfront investments in R&D, which is crucial for innovation and long-term growth, even before seeing any returns.
Marketing and Advertising Efforts
For starters, many of the most effective advertising channels, such as digital platforms like Google, Facebook, and Instagram, or traditional media like television, radio, and print publications, require businesses to pay for ad placements. Companies need capital to fund paid advertising campaigns across relevant channels continuously to maintain a consistent presence and reach their target audiences.
When businesses introduce new products, rebrand, or expand into new markets, they require capital for intensive launch marketing efforts. These include advertising campaigns, promotional events, public relations initiatives, influencer collaborations, and other strategies to generate buzz and awareness.
For consumer brands, particularly those in the retail or consumer goods sectors, offline grassroots marketing efforts such as sponsorships, billboards, trade shows, retail promotions, and free sampling require capital investment.
In these cases, businesses may need to raise the capital.
Capital Keeps Businesses Fearlessly Afloat
Ayush Marodia, founder of WorkspaceCo. has some great insights to share that can change how businesses think about and use money to grow confidently and quickly.
He says every business, big or small, needs money (capital) in the bank to feel confident about the future. This money acts as a safety net or backup fund. With this safety money, a business doesn’t have to worry about shutting down if things get rough and profits drop. The safety money helps the company keep running smoothly through any short-term troubles.
But capital isn’t just for tough times. It also gives business owners the courage and confidence to make bold moves and decisions faster. When you have money put aside, you can be braver in chasing new opportunities because you know you have the cash to make them happen quickly. However, spending this money wisely on the right things to grow the business is still important.
He concludes that capital is needed to take a business to the next level and expand significantly. Opening in new cities, launching new product lines, moving into different industries – all this scaling up requires a lot of upfront money investments. Capital gives business owners the confidence and means to implement their ambitious expansion plans. In short, having capital makes a business fearless and unstoppable when it comes to operating successfully day-to-day while also reaching for higher growth.
