Understanding Working Capital: What It Is, Where to Get It and How to Manage It

Understanding Working Capital: What It Is, Where to Get It and How to Manage It
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Must Reads for Both New and Old Entrepreneurs

What is working capital? Even some entrepreneurs considered old-hats in the business world may understand what it is but are stumped when it comes to managing it effectively. This guide to working capital (WC) offers all one needs to know and is great to bookmark and share with entrepreneur newbies and friends before they jump into the world of owning a business.

Learn all the important things you need to know such as the calculation for WC, why determining asset ratios are important and if your business can actually run in a zero working capital environment. How does one forecast or guesstimate sales and expenses to predict cash on hand—essentially your working capital? Find free downloadable templates to help you not only forecast but compare predictions with actual numbers. Learn ways to fund working capital whether it is through an SBA loan, investor or conventional bank loan. Are venture capital firms a good route to take and does your type of business qualify for these types of investors? Lastly, this guide walks you through the all-important business plan, what it should contain and a free format on how to write the most enticing and effective business plan.

Learning About Working Capital

Definition and Calculating

Working Capital

First off, it’s essential you know the definition of working capital and how to correctly calculate it. Here you’ll learn both including examples and ratio distorters. This guide walks you step by step on how to determine your true working capital using standard mathematical tools and teaches you the difference between short and long-term obligations and how they affect your bottom line.

The Cycle of Working Capital

Did you know there is a cycle to working capital? Essentially it’s the period of having funds available, using them to invest, and then awaiting the return on that investment. Once the cycle is complete, a company will have the necessary cash flow to begin the cycle again. If your cycle is not moving, this post will help you determine what to do to improve your cash flow.

Effective Management

Small business owners can run out of working capital fast if they don’t know how to manage it. Beyond using these funds in a routine cycle, working capital is also important to your company’s net worth and managing it effectively assures you have needed funds when times are tough. Things like considering lines of credit or conventional banks loans are reviewed and you can also find out why obtaining a company credit card may be a great way to build your company’s credit worthiness with vendors and lenders.

Total Asset Ratios

How liquid is your business or how much funds are available at a moment’s notice? Here, learn how to determine this important ratio which is often what investors and lenders look at most when valuing a business and its actual health. This easy to use formula is a must for every business owner and warns of distorters and the reason determining this ratio is important to look at often and keeping the ratio number on the forefront in the event it’s out of line.

Zero Working Capital?

Although tough to apply to all businesses, there is such a thing as zero working capital. Will it work for your business? Find out how this just-in-time methodology to cash flow works for both large and small companies. Some large corporations actually follow this zero working capital model and here, you’ll find out who these mega giants are along with tips on making the decision if this model will work or not for your business.

Wrap-Up Guide

Can you have too much of your available funds wrapped up in working capital? It’s certainly possible and here you’ll learn how and why this could happen. Re-cap of working capital ratios, cycles and management is also presented in this inclusive guide to a total understanding of how it works. This slideshow format article offers a brief description of what’s discussed above as a handy tool to review what you’ve learned or find the answers to specific questions about working capital.

Next, we’ll look at some important tools to aid you in keeping working capital alive and well at your business.

Must Have Working Capital Tools

Must Have Tools

Now that you understand the ins and outs of working capital, are there tools you can use to aid you in your financial peace?

Start-Up Forecasting

If working capital is all about having cash when you need cash, smart startup businesses can use the free example provided here on how to forecast how much cash they can expect based on sales, cost of sales and expenses by using a free and easy to download template. If you’re stuck on how to determine what your expenses will be, especially for new businesses, this guide tells you how to guesstimate these figures to ensure your forecasting is as close to actual as possible.

Examples of Cash Flow Proformas

Very similar to cash flow forecasting and essential for obtaining funding from lenders for loans from the Small Business Administration or attracting investors. For example, when determining cash flow do you know where the owner’s salary is calculated? Or, why are both sales and cost of sales essential in determining bottom line cash available. These proformas take the guesswork out of forecasting your bottom line.

Revisiting and Managing Are Essential

That first startup forecast must be revisited, analyzed and managed along with comparing projected cash flow to actual cash available. Here, you’ll learn how to do this and how to determine where to make adjustments to expenses and revenues to ensure your actual numbers are closer to your forecasted cash flow numbers. Your business is your life’s work and while it’s tough to make decisions on what and where to cut, by reviewing your forecasts on a regular basis, these decisions will become part of your normal business practices.

What If Your Business is Seasonal?

Have a business that operates in winter or summer months only? If so, you also need how to determine seasonal cash flow and how to best utilize what you have to your advantage by knowing when to spend and when to save. Learn how to plan for seasonal employees and predict how many you’ll need along with using what your competitors do as an example on how other seasonal business owners get it right time and time again.

Round Up of Cash Flow Business Ideas

Learn how to read and determine working capital, how to improve it and what to do when times are slow to ensure the cash you need is available in this round-up cash flow post. Things like determining when to forecast, monthly, quarterly or annually are discussed as well as a wrap-up of ideas to keep your working capital at optimal levels even when there’s not much cash coming in such as the importance of collecting on those outstanding receivables.

Now, let’s move on to funding working capital.

Where to Obtain Working Capital

Will banks or investors actually lend or offer money for that much-needed working capital or do you have to come up with it all on your own?

The Basics on Funding

Obtaining working capital through loans or investments is described in detail here. Learn about business borrowing options such as bank or Small Business Administration (SBA) loans versus investors in this great funding startup guide—great for business expansions too.

SBA Loans

There are many types of SBA Loans from the 7(a) loan to the Patriot Express Loan to simple ARC emergency loans. Here you’ll get a roundup of every type of loan the SBA offers along with tips and advice on how and where to apply. What financial statements will you need to prepare and how many years of tax returns (both personal and business) are necessary for SBA loans? If you’ve got a question on SBA loans, chances are you’ll find the answer here.

Patriot Express Loans

These loans for veterans and families of vets are available but how do they work, who is actually eligible and does your credit history affect the determination of the loan? While the government makes these loans seem like anyone can obtain these loans, some restrictions do apply and your credit worthiness and credit score are important as with any other type of loan. Take the guesswork out of whether you qualify for a Patriot Express loan in this great post.

The Controversy Over SBA Loans

Which bank claims the top spot in the SBA loan world and are these loans getting harder or easier to get? Learn the real facts behind these SBA loans and why they may be harder to get than you think. Time and again, questions and comments come in from our Bright Hub readers on why they can’t obtain an SBA loan. Here we answer why these loans, while available, are very similar to going to your bank and applying for a conventional loan. It’s also important to note the SBA does not loan money, only guarantees the loan up to various percentages depending on the type of loan.

Funding Ideas from Loans to Working With Existing Owners

Along with the SBA loan option find out what the possibilities of a simple bank loan and if buying an existing business, how to work with the existing owner to help fund the business in this guide to gaining cash for your startup. Some business owners nearing retirement will be willing to work with you by either financing part of your purchase price in a loan format or by staying on with a capital interest in the business until you can pay the purchase price in full.

What Banks Like

Finding Working Capital Funds

Before you apply for a bank loan for your business, do you know what they look for? Are they interested only in the business itself or do your assets or partner assets come into play? For example, if your credit is not so great, but your business partner’s credit score is excellent, most banks will still loan you the money, although you may have to up the collateral a bit. This is a must-read post before approaching your bank for a loan.

What About Investors?

How much is your business worth in the eye of the investor? Here, find out what they look for and why market value and equity value are really two different things. It’s true professional investors such as doctor or lawyer groups do like investing in real estate where smaller investors or the stand-alone investor may be enticed to invest via an exciting idea or product.

Are Investors Better Than Banks?

Is it better to approach a bank, the Small Business Association or simply find an investor to fund your business? Here, we’ll help you weigh the pros and cons of each. This can be a tough choice for some new business owners. Where investors may want to hold a higher percentage in the business say 70 percent to your 30 percent, banks can and will call in loans if your business defaults leaving you out in the cold. Learn how to make the smartest decision for your company here.

What’s the Best Way to Approach Angel Investors?

Angel investors are out there but tend to look at smaller, unique business startups. Find out the best way to approach them here to get the working capital you need. If your company is innovative, serves the community at large, or offers something no one else does, an angel investor may be interested in your product or service. Those businesses not so unique may have to skip the angel investor.

Venture Capital

Obtaining funds via the venture capital (VC) avenue can be scary but here, we’ll walk you through the basics on using venture capital firms in simple, easy to understand terms. Is it true venture capital firms look at business who have gross profits in the millions? Do venture capital firms ask for a percentage of ownership in your business? Before you sign a VC agreement, learn what VCs want first and what questions to ask.

The Pros can Cons of Venture Capital

Is it really simple to gain working capital through venture capital funding or should you skip the idea entirely? If you’re unsure, this is a must-read, especially for new business owners or those looking for funding options when loans aren’t an option. Often it depends on the size of your company or the product or service you offer. For example large VC firms may only be interested in science, health care or educational companies to invest in and may skip the smaller independent pizza owner. VC firms can be tough to deal with so understanding the advantages and disadvantages is key before making a decision to try out this funding avenue.

Using Your 401(k)

Many the wannabe entrepreneur often consider using their retirement funds to gain the working capital they need. Will this work for you and is it a good idea? Will you have to pay taxes if you make an early withdrawal on your 401(k)? What other options should you consider before choosing this idea to take all your hard-earned money out of savings and place it into a business venture? What if the business doesn’t make it? This post makes this tough decision easier.

Next, learn why you won’t gain working capital from any source without a business plan!

The Business Plan

Business Plan Path

We’ve looked at the definition of working capital, tools to help you manage it and how to find places to fund it, but these last two articles are a must read no matter what route you choose to fund your business and concern the all-important business plan.

Basic Business Plan Musts

Here, learn how to write a simple business plan, what elements should be included and in what order to grab the attention of the reader. Without a business plan, don’t expect to find ways to fund your working capital—these financial plans are an absolute must.

Take the Guess Work Out of Business Plan Writing

Find a review of Business Plan Pro, how easy it is to use and why it’s worth the small investment to ensure you include all the elements you need to gain the loans or investors for the working capital you need along with using this software to constantly maintain your business plan.

Businesses can’t run without working capital and each of the articles here will help you in not only understanding its importance but also how to get it and manage it. If you have questions on working capital you can’t find the answers to here, drop us a comment and we’ll find the answers you need!