Do you Know How Much Working Capital You Need?

working-capital-940x627Businesses often struggle to understand how much working capital is necessary for their business. It’s a difficult concept and nearly impossible to predict without multiple years in business. Even with plenty of years of experience, it can still be very difficult to predict.

Working capital is the amount of current assets, which exceed your current liabilities. However, just running the calculation won’t really help you assess your needs.

The Operating Cycle

A better tool for assessing a businessworking capital needs is the operating cycle. This will analyze the accounts payable, inventory and accounts receivable cycles. A more accurate estimate can be made, but it still may not be perfect.

Often, businesses need more than the accounts payable to finance the operating cycle. They may need working capital financing to help handle current expenses during the operating cycle.

A short-term working capital loan can be a very important tool for any small business to use. Some will use this type of financing during a specific time of year. For example, a retailer may use a working capital loan during September and October to stock up on inventory for the holiday season.

Sources of Short-Term Working Capital Financing

There are a few very common types of financing used for working capital, including:

  • Trade Creditors – With a good relationship, it’s possible to use a trade creditor to extend terms when you have a larger order.
  • Business Equity – For those in the first or second year without any profitability equity funds can help with short-term working capital needs.
  • Line of Credit – Many businesses prefer a line of credit because it can be used again once the balance is paid down.
  • Factoring – After taking on a larger order, you can use a factoring company to sell the accounts receivable at a discount. They will be responsible for collecting.
  • Short-Term Cash Advance – Some businesses may not qualify for any other type of financing and a short-term cash advance may be just what they need.

Regardless of the method used, most businesses will require working capital financing at some point during the operating cycle. Take this into consideration and make sure you are prepared!

Recent Posts