For any small business, working capital is a difficult concept to grasp, especially when you are first getting started. It is also something that comes with a variety of advice, depending on who you are talking to. Simply put, your working capital is the measurement of your assets, minus any liabilities that are in place.
While this seems like a simple concept, it is actually somewhat complicated. It is also something that can affect your financial future because many financial institutions determine credit worthiness based on your working capital. In order to make the idea of working capital a little easier, here are a few things that you should keep in mind
Calculating working capital is one reason that lenders will ask for a copy of the company’s balance sheet. Through the information that is found on the balance sheet, a business’s current position is calculated. This position is used to learn more about the financial condition of the company in question.
One of the best ways to begin examining a balance sheet for information regarding the working capital is to rely on the operating cycle. When you are using the operating cycle to determine working capital, you will look at your accounts payable and receivable as well as inventory and how they correlate with one another.
Understanding your working capital will also give you a better understanding of what your cash flow will look like. When working capital increases, this means that you will have more cash to work with on a short-term basis. Likewise, the opposite is also true.
Having a strong handle on your working capital will help you to know when you are in need of working capital financing. There are times in every business where this is a necessity and being prepared for this need will help your business be more successful.
Basically, you should think of working capital as the money that you need to run your company from one day to the next. Without proper funding, operation would not be a possibility. There are many ways that business can obtain working capital financing.
Lenders are looking to supply funding to companies that are strong and healthy. One way to demonstrate this is by having assets that are continually refreshed. This shows banks and lending institutions that these assets have a strong likelihood of repayment.
One of the most common ways that businesses are able to gain financing for their working capital budget is through accounts receivables. This means that the business will receive financing based upon the amount of money that they are due from customers, but that they have not received the payment yet.
There are many times throughout the year when a company may require working capital financing. For example, sometimes it is required when the company is going through a low point in sales. This is common when a company offers products that are seasonal or only purchased at certain times of the year.
Companies who are looking to grow their business may also require working capital. When this is the case, the company will use the funds to pay for their day-to-day expenses so that they can focus their own funds on growing the business.
Unfortunately, not all businesses are able to apply for working capital financing through traditional lending institutions. However, there are still options available for those who are in this situation. We offer a simple loan application process and very little paperwork. Regardless of the reason you need working capital financing, we have options that can help fit your needs.
Contact us to learn more about working capital and the process, or to apply for a working capital loan today.