Most small business owners struggle to understand the concept of working capital loan. The term means different things to different people. In business, working capital is defined as the amount by which the value of your assets exceeds the value of the liabilities.
However, using this definition when trying to calculate working capital over a period of time will not accomplish much. The bare definition will not help you figure how much working capital you need and what can be done to meet it. A better way of determining the needs of your business when it comes to working capital is the operating cycle.
Operating cycle can help determine accounts payable, inventory and accounts receivables cycles in terms of days. In a nutshell, with the operating cycle, you can analyze the accounts payable by the average number of days it takes to pay a supplier, inventory by the number of days it takes to turn over the sale of a product, and accounts receivable by the average number of days it takes to turn over the sale of a product.
For most businesses, relying on accounts payable online to finance operation cycle (inventory days + accounts receivable days) is a challenge. As a result, working capital financing is usually required. The financing shortfall can be covered by funds borrowed externally, net profits or a combination of the two.
If you are running a small business, it is likely you will need short-term working capital at some point. For example, sales usually spike in November and December. During these months, retailers need additional working capital to fund the expected inventory buildup. Get business working capital loan here!
Even if you do not run a seasonal business, you may get occasional spikes or orders during peak months. This will make it necessary for you to get working capital to cater for the increased accounts receivables and inventory.
A few small businesses may have enough cash reserves to use for funding their working capital requirements. However, this is usually not the case with new businesses. If you find your business requiring short term working capital during the first few years of operations, it is important to know where the funds will be coming from. Therefore, you should plan ahead. Getting caught off-guard can make you miss a big order that could have potentially moved your business to the next level.
The above is an overview of the importance of having working capital. Know about loans for business here!