Business Capital Solutions

While every company is unique and different, there are a handful of practices and rules of thumb that people should utilize in analyses and workflows. So what is a business capital? Also known as net working capital, it reflects the amount of money a company has at its disposal to pay for immediate expenses, like short-term expenses, including inventory, payments on short-term debt, and day-to-day expenses—called operating expenses.

If a company has enough working capital, it can continue to pay its employees and suppliers while fulfiling other obligations, like interest payments and taxes, even if it runs into cash flow problems. On top of that, working capital can also be used to fund business growth without incurring debt. If the company does need to borrow money and demonstrates positive working capital, it can make it easier to qualify for loans or other forms of credit.

So how is it calculated? You can do so by subtracting current liabilities from current assets, as listed on a company’s balance sheet. Current assets will include cash, accounts receivable, and inventory. On the other hand, current liabilities include accounts payable, taxes, wages, and interest owed.

Additionally, business capital can also help smooth out fluctuations in revenue. Many businesses experience seasonality in sales, selling more during some months than others, like festive seasons. With adequate working capital, a company can make extra purchases from suppliers to prepare for busier months while meeting its financial obligations during periods where it generates less revenue.

For example, a business may generate 70% of its revenue in November and December — but it needs to cover expenses, like rent and payroll the entire year. By analyzing its working capital needs and maintaining an adequate buffer, the business can ensure it has sufficient funds to stock up on supplies before November and hire temps for the busy season while planning how many full-time staff it can support.

Moving on, since working capital is equal to the difference between current assets and current liabilities, it can be either a positive or a negative number. Needless to say, positive business capital is always favoured since it means a company has enough funds to pay its operating expenses. But do note that the figure can fluctuate over time, causing the company to experience periods of negative working capital due to unexpected short-term expenses.

While positive working capital is better, having too much money sit idle can potentially hurt a company. Those inactive funds could be used to pay down debt, or invest in the long-term future of a company by purchasing long-term assets, like technology. Meanwhile, if a business wishes to increase its working capital, for example, it needs to cover project-related expenses or experiences a temporary drop in sales, there are tactics to bridge that gap involving either adding to current assets or reducing current liabilities.

Working capital solutions include:

  1. Taking on long-term debt which will increase current assets by adding to the company’s available cash but doesn’t overly increase current liabilities.
  2. Refinancing short-term debt as longer-term debt. This will help reduce current liabilities because debts are no longer due within a year.
  3. Selling illiquid assets for cash, thus increasing current assets.
  4. Analyzing and reducing company expenses and reducing current liabilities.
  5. Analyze and optimize inventory management to minimize overstocking and the likelihood that inventory will need to be written off.
  6. Automate accounts receivable and payment monitoring. This can help increase cash flow, reducing the need to draw on working capital for daily operations.

Why would a business require additional working capital?

  • Many businesses suffer seasonal differences in cash flow, which will need extra capital to prepare for a busy season or to keep the business operating when there’s less revenue.
  • Most businesses have periods when additional working capital is needed to fund obligations to suppliers, employees, and the government while waiting for payments from customers.
  • Additional working capital can help improve businesses in other ways like enabling you to take advantage of supplier discounts by purchasing in bulk.
  • Working capital can be used to pay temporary staff or cover other project-related expenses.

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