Each business must manage its short- and long-term capital needs using revenues. Profitable businesses have more revenue than expenses. However, even a successful company can face temporary cash flow issues if it lacks sufficient working capital. So, how do you calculate your working capital needs?
What is Working Capital?
Working capital is the money you need to pay your current bills. This includes covering operating costs such as payroll and restocking inventory while waiting for clients or customers to pay their invoices. Working capital is essentially the cash used to handle these expenses. How much working capital will you need?
Estimate Working Capital Needs
To figure out your working capital needs, you need to understand your business’s operating cycle. This involves analyzing the days your accounts receivables, payables, and inventory cycles take.
Your operating cycle is the average number of days it takes to get paid. You calculate your inventory cycle by determining the number of days from when you receive goods to when you convert them into cash or accounts receivable. The payment terms set by your suppliers also impact your accounts payable cycle.
Calculate Your Working Capital Gap
To find out your working capital gap, add the days of your accounts payable and inventory cycles. If your accounts payable cycle is longer, you’re in luck. However, this isn’t always the case. This gap represents the time you must wait before getting paid.
Finance Working Capital
New and smaller businesses often don’t have the cash needed to complete their operational cycle. This doesn’t mean your business isn’t viable; it might just need a little help to get through the operating cycle. If invoice factoring doesn’t suffice, consider obtaining a working capital loan.
Working Capital Loans for a Small Business
These loans will show up as a liability on your balance sheet, which is a cost of doing business that can help your company stay afloat during the payment cycle. Working capital loans can also be useful for meeting seasonal demands. For instance, many retailers stock up their inventory in the fall for Christmas sales but have to wait several months before they can convert this inventory into cash.
This post was written by a professional at Blue Tree Financing. Blue Tree Financing is a dynamic financial institution with a steadfast commitment to empowering businesses. With a diverse range of offerings including capital injections, term loans, restaurant business financing, merchant cash advances, and invoice factoring, we stand ready to provide the financial solutions your company needs. When traditional banks turn you away, Blue Tree Financing steps in with a resounding “yes.” Our mission is to fuel growth, unlock potential, and drive success for businesses of all sizes. Join us on the path to prosperity.
