In simple terms, working capital is the difference between the current assets and current liabilities of your company. However, figuring out the amount of working capital your business has available is typically more complex than that. At Topfund Capital, we recommend determining cash on hand by analyzing your company’s operating cycle.
What Is Included in the Operating Cycle?
When reviewing the operating cycle for your small business, look at accounts payable, accounts receivable, and inventory in terms of the average number of days per cycle. That means you analyze each category based on the typical number of days it takes to complete an action.
Accounts payable is based on how long it takes your company to pay its debts while accounts receivable considers the average number of days that pass before you receive customer payments. Reviewing the inventory portion of your operating cycle involves counting the days from the time you take a new product into inventory until the time you sell it.
If you’re like most small businesses, you don’t have enough coming into accounts receivable by itself to finance the entire operating cycle. The most common way for small business owners to make up for the shortfall is to take from net profits generated internally, borrowing funds externally, or combining these two actions.
How to Obtain More Working Capital When You Need It Most
Whether it’s gearing up for a busy season or another common business need, you will eventually need to expand working capital to keep up with demands. Here are some working capital financing options to consider until cash flow improves:
- Factoring, which involves selling accounts receivable invoices to a third-party organization and receiving most of the invoice value immediately.
- Trade creditors with whom you already have a proven track record of responsible repayment.
- Business line of credit that provides flexibility and the ability to borrow up to the credit line each month without having to apply for a new loan every time.
- Short-term loan from a bank, credit union, or finance company
Topfund Capital offers these and other working capital financing options. Please contact us today to learn more.