For many small business owners, figuring out their working capital needs is harder than they think. Only calculating by how much their assets surpass their running costs might give a rough number, but that calculation doesn’t give much information. Instead, small business owners should be defining their working capital needs based on their operating cycles.
By evaluating accounts receivable, inventory needs, and accounts payable in terms of cycles of days, business owners get a more rounded view of their needs:
- Accounts receivable should be measured as to how long it will take to receive payment from a buyer.
- Inventory should be measured as to how long it takes to sell a product from the day it comes in, to the day it leaves the store.
- Accounts payable should be measured as to how long it takes to pay a supplier.
Breaking down working capital needs into these three tiers shows business owners exactly when they need capital.
Businesses run in cycles of money-in and money-out. When inventory needs to be restocked and accounts receivable are still in limbo, business owners must be able to front some available short-term working capital. A business can rarely cover their overhead just through accounts payable financing. This is especially true in times of season inventory buildup.
To cover costs during these difficult times, business owners can look for capital through:
- Equity – businesses may need an injection of private funding from friends, family, or other outside investors.
- Supplier Credit – Maintaining strong relationships with suppliers can help cushion businesses through tough times. Say a business owner knows they can ship out inventory in 30 days. A supplier may credit payment for those 30 days based on their relationship.
- Factoring – Consider selling accounts receivable to a third-party at a discount.
- Credit Lines – Banks may extend a line of credit to well-establish businesses.
- Short-term Loan – If a business does not qualify for a credit line, they may qualify for a short-term loan.
The financial experts of Kasher Capital can help you identify all your working capital needs. Give us a call today!