FAQ: A Business Owner’s Guide to Working Capital

Every business experiences multiple setbacks on its way to success. How one navigates those low points financially determines the pace at which the company grows and flourishes. So, how does one do that? By understanding and strategizing the working capital of the business! For new enterprises that are unsure of how to build the working capital, hopefully, this blog will help you. We will explore the concept of working capital, including working capital loans.

What is working capital for an enterprise?

Working capital is the difference between a company’s existing current assets and short-term liabilities. The existing assets are anything that the business owner can liquidate into cash, and the liabilities are the expenses incurred by the company within the same time frame.

Your accounts receivables, prepaid costs, inventory, marketable securities, cash and cash equivalents are the assets. The accounts payable, tax, wages, customer deposits, and interest payments are the liabilities. The working capital determines the overall financial stability of a business. If you have a high net cash flow then you have a significantly high working capital, which means that the finances of your business are in good shape.

What are Working Capital Loans?

Working capital loans, on the other hand, are short term loan options that allow enterprises going through a cash flow deficit to take care of the day-to-day operational expenses like labour costs, marketing and promotional expenses, accounts payable, etc. You cannot use working capital finance for business expansion, investments, or long-term asset buying.

How to Calculate Working Capital?

Calculating working capital is as easy as it can get;

Current Assets – Current liabilities = Working Capital of a business.

Here is an example;

Let’s say that your business owns $20,000 in stock and $50,000 in cash. The accounts receivable amount to $30,000. This will make your existing assets to be $100,000. Now, let’s say your taxes, payroll, account payables, etc., amount to $70,000. That leaves you with a surplus amount of $30,000, your working capital.

However, calculating the working capital can be complicated given the circumstances. In that case, you will have to calculate the cash conversion cycle of your company. For that, you need the following numbers;

• Inventory days (days to pay for materials and labour to manufacture product or shelf life of the stock).
• Creditor days (days to pay the suppliers).
• Debtor days (days to collect payment from debtors).

Now, here is another formula to determine your working capital;

(Inventory days + debtor days) – creditor days = operating cycle/cash conversion cycle.

How to manage Working Capital?

Here are a few ways to manage your working capital:

• Generate your invoices promptly on time.
• Run your credit checks diligently.
• Set stringent deadlines for payments for debtors.
• Follow-up with the debtors to hasten payments.
• Create payment plans and easy payment options.
• Manage your inventory efficiently.
• Refrain from excess inventory.
• Optimize your sales projections.
• Update your inventory records.
• Pay the suppliers on time and not early.

All of these tips can help you maintain healthy working capital. If there is a deficit, you can always resort to short term financing, using working capital loans.

Conclusion

Are you seeking working capital loans to fix your cash flow gap for continuity of day-to-day expenses? Reach out to Broc Finance, one of the fastest growing finance brokers in Australia. We can facilitate the best rates and terms for your working capital finance through a credible lender. Visit our solutions page to check out the diverse range of offerings in business financing for SMEs.