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How to Estimate Your Working Capital Requirements

Every business has short and long-term capital needs that must be met through incoming revenues. If your business has more income than expenses, it’s profitable. However, even a profitable company can have temporary cash flow problems if it doesn’t have enough working capital. Here is how to estimate your working capital requirements.

What Is Working Capital?

Working capital is the funds you need to pay your current bills. While you’re waiting for your customers or clients to pay your invoices, you still need money to make payroll, order more inventory, and cover your other operating expenses. The cash used for these expenses is called working capital. But, how much working capital do you need?

Estimate Working Capital Needs

While you need enough cash to ensure that your current assets exceed your current liabilities, the calculation is a little more complicated than determining the difference between the two. To understand your working capital needs, you need to have a good grasp of your operating cycle. For that, you analyze the accounts receivable, inventory, and payable cycles in terms of days.

small business invoice factoring in georgia

Your operating cycle for accounts receivable is the average number of days it takes to get paid. Similarly, you calculate your inventory cycle from the time you receive the product to the day you turn the merchandise into cash or an accounts receivable item. Your suppliers also have payment terms, which are part of your accounts payable operating cycle.

Calculate Your Working Capital Gap

When you add your accounts receivable and inventory cycle days together, that’s the number of days it takes to receive cash back from your initial investment. If your accounts payable cycles are longer than that, you’re in luck. But usually, that’s not the case. However, this is how much time you have to go without getting paid. And, that’s where your working capital comes into play.

Finance Working Capital

Some businesses have enough cash to provide the necessary working capital until they complete their operating cycle, but new and smaller companies generally don’t. That doesn’t mean your business isn’t viable. You just need some help to get through the operating cycle. One part of the solution may be invoice factoring, but when that’s not enough, you can get a working capital loan.

Working capital loans for a small business in Dalton, GA, will affect your balance sheet, because they’re a liability. However, this is a normal cost of doing business and can keep your company afloat through the payment cycle. Working capital loans are also very effective for meeting seasonal demands. For example, many retailers stock up in the fall for Christmas sales and have to wait several months until their inventory is converted to cash.