How Much Working Capital Does Your Business Need?
The working capital your business has is the difference between your current assets and your current liabilities, although knowing this won’t tell you exactly how much working capital your business really needs. In order to determine that, you’ll have to analyze your inventory, accounts receivable, and accounts payable for a given period.
This gets a little tricky because Accounts Receivable have to be analyzed by how long it takes to receive payment on a given account, inventory must be analyzed by how long it takes to turn it over and accounts payable must be analyzed by how long it takes to pay a supplier. What most businesses will find is that working capital is needed to purchase inventory, so that Accounts Receivable can be increased in order to sustain profitability.
The key to calculating how much working capital your company needs is to determine how much funding is necessary to cover accounts payable, and have all the inventory necessary to achieve the level of Accounts Receivable you’re looking for. Here are some of the best sources for short-term working capital.
Factoring
Once you’ve generated invoices for purchases that your customers have made, a factoring company can purchase your invoices from you to provide you with immediate working capital that you can use for buying more inventory, or any other business purpose.
Trade creditors
Assuming you have a good relationship with your trade creditors and have made prompt payments in the past, you may be able to secure favorable terms when you need to purchase materials for a large order.
Equity
If your business is in startup mode or has only a brief period of history to show to lenders, you may have to rely on personal resources to generate working capital. This might also come from friends and family, or business acquaintances that you’ve have made in the past.
Lines of credit
Businesses which are new will probably not be able to secure a line of credit from a traditional lender. However, if you have several years of good business history and strong collateral, you might be able to secure a line of credit which can provide all the working capital you need.
Does your business have sufficient working capital?
If your business lacks the working capital needed to grow and achieve the next level of success, we may be able to provide some options for obtaining the necessary funding.
Contact us at Approved Business Lending to explore some options for expanding your working capital resources.
