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Working capital. It’s a buzz word you come across a lot in the business world but what does it actually mean? Read on to find out what working capital is, how it works and the advantages of being in a strong working capital position, including:
1. Paying others before you’ve been paid
2. Being more flexible with your terms
3. Negotiating with suppliers
4. Fulfilling your commitments, all year round
5. Saying yes more often
What is working capital?
Put simply, working capital is the cash your business has readily available to use for day-to-day operations. Put less simply, working capital is whether or not your current assets are enough to cover current liabilities. Working capital is also sometimes referred to as operating liquidity, cash flow and current ratio.
How does it work?
If current assets are less than current liabilities, your business is running a working capital deficit. This makes it difficult to cover day-to-day expenditure such as paying staff, rent or suppliers. For most growing businesses, the invoices you’ve issued for completed work are your biggest asset. The challenge however is that you might not be paid for 30, 60 or even 90 days. That leaves a lot of your working capital tied up in your outstanding invoices. In this way, your business might have really good profitability but feel the pressure of poor working capital. As the saying goes: “turnover is vanity, profit is sanity, cash is reality”.
What are the advantages of working capital?
If your business is in a negative working capital position, you may choose to improve it using a line of credit from a finance provider. Common working capital finance solutions include overdrafts, business loans, factoring and invoice finance. With invoice finance, a finance provider (like MarketInvoice) will give you an advance against your outstanding invoices. This means that you can get up to 90% of the money upfront, without having to wait for your debtors to pay. You can get funding against some – or all – of your invoices, depending on your requirements. Invoice finance is the most flexible and cost efficient option for many business owners because you can pick and choose the invoices you want to finance and the facility scales with your business. This solution also has a simple fee structure and only requires you to pay interest on the funds you use.
With regular access to working capital when you need it, your business can:
Easily pay staff wages or those hefty VAT bills – even if you’re still waiting to be paid by your clients.
Offer credit terms to your debtors to win more lucrative contracts with bigger clients.
Cut down your costs by negotiating early settlement discounts with suppliers.
Invest in more stock at your busiest times of year to keep up with seasonal demand.
Cover the upfront costs of kicking off a new project before you’ve been paid for the last one.