How to Get Working Capital
Every business needs adequate working capital to keep their operations running smoothly. It’s the money that’s used to finance your short-term obligations—such as paying suppliers, paying employee salaries, purchasing product inventory, or covering other day-to-day expenses.
Without the right amount of working capital, a business can find itself with a cash flow shortage. This can lead to a number of challenges, ranging anywhere from being unable to pay your suppliers to being forced to cut back on your workforce. On the flip side, having too much working capital is not ideal either. There are better options available than having your cash sit idle.
Read on for guidance on how to properly manage your working capital, and how Kish can help.
How to Calculate Working Capital
There is a simple calculation called the Net Working Capital Formula that determines the amount of working capital a business has:
Current Assets – Current Liabilities = Net Working Capital
Current Assets are short-term assets that a business can easily sell or convert into cash within a one-year period. Examples include cash, funds in a checking or savings account, short-term investments, or accounts receivable.
Current Liabilities are financial obligations that must be met within a one-year period. Examples include short-term debt, accounts payable, interest payments, or income and payroll taxes that are owed within the year.
Knowing and understanding these numbers can help businesses better plan for the future and minimize the chances of facing cash flow issues.
Cash Flow vs. Working Capital
They may sound similar, but cash flow and working capital are not the same. Working capital assesses both accounts receivable and accounts payable as well as other liabilities.
Cash flow, however, only takes into consideration the amount of cash a business has coming in and going out over a certain period of time. It doesn’t take into account business liabilities.
That being said, working capital gives a more accurate picture of a business’s financial situation.
Ways to Get Working Capital
Businesses have different ways to get working capital financing. Let’s take a look at some of the most popular options that are available:
- Business Loans
Business loans are available in all different shapes and sizes, and it’s often beneficial to choose a loan that’s designed for a specific business need. For example, an Equipment & Term Loan could help with the purchase of new commercial vehicles, or an Agricultural Loan could help a local farmer or agribusiness secure financing for their operation.
- Line of Credit
A business can get access to capital with a Business Line of Credit—a flexible solution that can benefit both small and large businesses. With a line of credit, a business can draw on a certain amount of cash at the time it is needed, and doesn’t repay any of the money until they actually draw on the line of credit. The business pays back what is borrowed with interest, and the amount of available credit increases until the original amount is reached.
- Business Credit Cards
When managed the right way, Business Credit Cards are a smart way for businesses to get easy access to short-term working capital. Often referred to as corporate credit cards, this type of card can be used to make a wide range of purchases, including those made by employees. Many can offer low interest rates as well as cash back or flexible rewards, and they are also a good way for a newer small business to build credit.
Is Too Much Working Capital a Bad Thing?
When a business regularly has too much working capital, is that a bad thing? Yes, it can be.
If excessive working capital sits idle, a business could be missing out on opportunities to invest in long-term assets or pay down debt. It can also lead to making additional purchases that are unnecessary and wasteful.
Need working capital for your business, or want to learn more about how to manage it? Talk to Kish today to find solutions that fit your needs.