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Working capital finance is one of those seemingly esoteric business school topics that turn out to have very real and rather fundamental applications for the small business owner with no training or prior experience except his or her own common sense. Any sole proprietor, as the term for these “moms and pops” goes in business school classes, knows about working capital finance from having to deal with inventory and accounting day in, day out! But when these small-time businessmen and women think of it, they are usually only imagining two things, borrowing money or putting more equity in their business – the traditional sources of business capital.
Yet most business owners don’t realize that one of the greatest ways to finance working capital is to let their suppliers do it for them! There’s no need for small business loans when the money is already there.
It’s true, and this article will briefly outline how. But before we do any further, the usual legal disclaimers are necessary: what follows shall be understood as comprising of mere opinion only and should in no way be misconstrued as professional advice of any kind whatsoever by anyone for any reason! Readers are strongly urged to consult with all the relevant professionals, properly licensed and/or otherwise qualified, when making business decisions of any financial consequence, for neither the author nor the publisher shall be held liable in any manner for sharing information that is simply provided for “human interest” purposes.
All right, now with that out of the way, let’s explore how working capital finance can be secured through one’s very own creditors!
The way to do this is, of course, by simply letting your suppliers finance your assets. If you think about it, suppliers typically finance working capital already, insofar as they provide and deliver supplies but only receive payment for them at the end of the month (or even later, in some cases). Such a situation in effect frees up your money for other purposes, money that is literally working capital!
What you need to do is find a formula for calculating your supplies-to-finances ratio right now so that you can increase and maximize it to your benefit. One easy to understand formula for supplier-financed working capital is to multiply your total assets by a hundred (to generate an answer in percentage form) and then divide by the amount of your accounts payable (whether monthly or whatever terms you have secured).
One must “think outside the bank” to realize this strategy, but if you think about it, working capital finance is easy when carried on the backs of your suppliers. They’re already participating, whether they’re aware of it or not, and since you’re only taking advantage of a system that’s already in place, you needn’t worry about any legal concerns.
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Tags: working
Posted in Capital · July 18th, 2010 · Comments (0)
Working capital falls under the heading of “operating capital” in business management theory. It is a way to measure finances, namely those immediately available to a business. Working capital is thus an indication of operation liquidity, as simply derived by subtracting the amount of current liabilities from the amount of current assets. When current assets are less than current liabilities, a condition of working capital deficiency exists, also known as a working capital deficit.
It should be noted that your business can be chock full of assets and even be greatly profitable but still short on liquidity if those assets and all that profitability cannot for some reason be readily convertible to simple hard cash – and this is where positive working capital is important, for a company that can continue current operations with sufficient funds available to satisfy all upcoming debt and expenses. Managing working capital is thus an important aspect of any business, involving inventories, accounting (both billable and payable), and cash flow. Working capital is also important for the role it plays in any valuation of a company.
Oftentimes, banks are not the most suitable solutions for problematic situations concerning working capital. It’s no secret that you’re liable to get just as many problems from a bank as the ones you solve, jamming the machinery of business with all kinds of red tape and paperwork. Not to mention their penchant for nickel and diming customers, especially now that we’re sunk in the depths of a recession. Working capital alternatives include small business loans, cash advance financing, merchant cash advances and commercial loans made out not by banks but by businesses that specialize in just such products for specific niche markets. Particularly in these economically challenging times, banks have drastically reduced or even outright eliminated whole lines of credit. One must “think outside the bank” these days, especially as a small business, even if not currently a struggling one.
This means, by implication, that working capital management might be improved. Due to the effects of the financial meltdown that are still reverberating throughout the banking sector, working capital options now assume a much greater importance. One possibility, under the right set of circumstances, can result in a reduction of credit card processing fees when obtaining merchant cash advances. And because there are so many different factors involved in so many different possible policies, a further suggestion would be for the use of working capital experts. Professional advice is generally welcome no matter what, but in these tough times it is often necessary. Dealing with new funding sources and working capital solutions is time-consuming even if it weren’t so potentially confusing, but using finance experts to help evaluate the best options available today seems downright prudent, if not also wise.
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Tags: working
Posted in Capital · July 18th, 2010 · Comments (0)