Working capital is the essential money you have left to finance everyday business operations after accounting for all your short-term liabilities. It can be written as a simple calculation:
Current Assets – current liabilities = working capital
Current assets are generally counted as those coming into your business which can be converted into cash within the next year which includes cash, stock and debtors.
However, be aware that when looking at current debtors, you should also consider how quickly your customers tend to pay as this will severely affect your working capital. Always be aware that an invoice doesn’t necessarily count as cash in the business.
You should also consider the type of business you run and how long it generally takes to convert stock to cash. Your working capital liquidity will affect your business needs, and some will have a much shorter sales cycle than others.
Equally your liabilities should only include those payable within the next year, so any long-term loans would be excluded.
The ideal outcome following this calculation is that you will have a positive working capital. Unfortunately, in some cases where a negative working capital is continued for a time you will find it increasingly difficult to meet your immediate financial responsibilities.
It is also a good idea to check your working capital ratio which you can calculate by dividing current business assets by current liabilities. If this calculation gives you a number below 1 then you have a negative working capital and probably need some help financially.
When your business doesn’t have sufficient cash flow on hand it becomes difficult to keep up with your immediate financial responsibilities such as payroll, purchasing stock, paying rent and utilities, suppliers, and HMRC.
Many businesses will suffer such cash flow problems time to time and it is important to keep them in check and avoid any future longer term financial issues.
This is where a working capital loan can help, which typically has a shorter life span than most other business loans. They are used to fund your daily operations and help fill any temporary funding holes as opposed to financing long-term projects or investments.
Working capital loans tend to be used more by smaller businesses who have limited access to other funding methods. A working capital loan will provide less risk to the lender in the way they are structured, whilst also providing the vital short-term funding to your business.
Often those businesses with seasonal fluctuations will benefit from working capital loans. The loan is then usually repaid by the time the busy season begins and tides them over in the mean-time.
Whilst growth is positive it can also be a difficult period where you need to invest prior to receiving the benefits of the growth. Everyday expenses can become difficult to meet when heads are increased, or stock levels need to be higher.
You may come across a business opportunity that you don’t want to pass up, however it may take a while to reap the benefits. A working capital loan for example could help you to take advantage of a sale on stock or to win a new contract which will be good for business longer term.
Due to the nature of these types on loans, its quick and easy to apply and most lenders will be able to provide you with a quick decision and you can receive funds within 24 hours for use in an emergency.
Some loans are unsecured meaning that you won’t need to put up real estate or collateral to access a working capital loan, in most cases a personal guarantee to pay back the loan will suffice.
A working capital loan is usually repaid over a period of months, meaning that you are not tying up more cash flow for a long period of time.
Your lender will place few, if any, restrictions on how the cash is spent. At Cashsolv we are more interested in keeping you in business and ensuring a positive future.
Cashsolv provide flexible working capital loans and have helped many businesses just like yours to overcome cash flow hurdles.
It is important to repair a low working capital before cash flow problems get out of hand. Continued low or negative working capital can indicate an underlying issue that needs attention and Cashsolv can help to advise on this area.