Updated: Feb 13
Working capital is one of the most common concerns of growing businesses. This financial concept is also hard to understand, especially if you are a startup or a newbie. People derive different meanings from this concept. The experts define working capital as an amount that exceeds current assets and liabilities. However, figuring out the needs of your working capital by simply running a periodical calculation to analyze it is not an easy task.
That is to say, you need some useful tools to determine the working capital your business needs to exceed its assets. The operating cycle, for example, is a great tool to analyze the account payables, inventory, and account receivable in specific terms of days. Simply put, by calculating the number of collection days of an account, you can analyze the account receivable. Similarly, you can calculate inventory by calculating the time taken by your product from its selling point to cash conversion.
In addition to the operating cycle, the type of business also has an impact on the working capital when it comes to running it smoothly. Giant corporations often get by with poor working capital as they can raise funds and revenues quickly, selling stock on the financial markets or dumping assets to competing companies. Small businesses, on the other hand, struggle to maintain sufficient working capital. If you are a small business and looking for additional working capital to grow your business, reading this article might help you; if you are ready to start the process of factoring with Porter Capital just click here to apply instantly. Let us begin with understanding what working capital is.
What Is Working Capital?
Working capital is an important business financing terminology. As mentioned earlier, it highlights the difference between the current assets and liabilities of a company. Current assets refer to the things the company owns and use them to turn into cash. Current liabilities, on the other hand, are the expenses and costs a company incurs at the same time. Some of the common assets a B2B business include are:
Current liabilities are:
Cost of supplies ( requires to purchase goods)
Short-term debt payments
The working capital of a company reflects not only its budget management but also operational efficiency. If the current liabilities of your business are more than its assets, the working capital will always be negative. That means your business may struggle to meet the financial obligations.
How Much Working Capital Does Your Business Need
To understand how much working capital does your business needs, it is vital to figure out how cash flows through the business. That is to say, understanding the “working capital cycle” plays a key role in helping your business grow and excel.
The working capital cycle comprises:
How quickly your business turns its current assets into cash (inventory and account receivables)
How quickly your business uses that cash to pay its liabilities (account payable). Remember that this cycle refers to the total “Turnover Rates” specifically for inventory, accounts payable, and account receivable.
The previous turnover rates of any business work as a base to forecast its growing needs of working capital. The first step is to analyze and evaluate the income statement and current balance sheets to find out:
The inventory turnover of a business in the specific days
Number of days customers take to make payments (account receivable turnover)
Number of days a business takes to pay to its vendors
Once a business calculates the total turnover rates, it is in the state to forecast its working capital based on the growth plans. This growth requires carrying a high level of inventory as well as account receivable. This is where a business needs extra working capital.
To calculate this, businesses need to analyze their income statements, including product costs, sold products, and projected sales. By using turnover ratios of working capital and figures mentioned in the income statement, businesses can estimate how much working capital they need to grow and expand the operations.
Common Ways to Improve Working Capital
Invoice factoring or invoice financing is, without a doubt, one of the easiest and convenient ways to use as additional working capital. Many businesses, especially the small ones, consider invoice factoring a panacea to their cash-flow issues. The businesses hire factoring company services to sell their invoices after filling an order. The factoring company handles all the collection after buying the account receivables of a business.
Precisely, factoring enables businesses to turn slow-paying receivables from reliable customers into cash. The solution is an excellent way to provide immediate funds to help businesses maintain cash flows and run operations.
Invoice factoring is all about trading your invoices. It is one way to provide you with a reliable and trusted funding source. That is what provides a business, whether small or large, with additional working capital. The best part of this financial solution is that businesses can trade their invoices on an ongoing basis. However, they need to have potential customers and solid invoices. The funding solution depends on how much a business sells to its customers. It gives entrepreneurs unparalleled flexibility when it is about operating and growing the business.
If your company is in its initial phases of operation and yet to become profitable, relying on equity funds can be a suitable idea to fulfill your business’s working capital needs. The funds can be from personal resources or third-party investors.
Line Of Credit:
Banks and financial institutions usually do not offer a line of credit to small businesses. However, if you run a business that is already in a good state or has sufficient capital, it can qualify for a line of credit. This funding process allows entrepreneurs to borrow funds or immediate cash for their short-term needs. Once the business repays its funds, it can collect its account receivables earned from the sales peak.
At the end of the day, a successful staffing, manufacturing, or services business that has a sustainable future is one with a good working capital line of credit that easily pays its expenses and always has ample funding to use for its growth in future. Thus, it is important to not only figure out how much working capital your business needs but the right finance alternative such as invoice factoring to increase working capital - Porter Capital can help, just fill in the form below and one of our financial development officers will be in touch: