Understanding working capital offers
Online sellers can vary quite dramatically, but there’s one thing that they all share – they all need enough working capital. You could be enjoying a very high number of sales each month, but if you don’t manage your working capital well enough, you might need to fold the business.
We will explain everything there is to know about working capital so that you can keep your cash flow and your business needs on an even footing.
What is working capital?
Working capital can be thought of as the money that works hard for your business, every day. It’s the money that you need to buy your inventory and meet immediate payments like taxes.
Your business has many assets. Some of these are fixed assets, like your real estate or your large equipment. They count on the plus side of your business balance sheet, but you can’t use them to buy more stock in a hurry. You need capital – accessible, liquid cash – to do that. That’s working capital.
Working capital is not the same as long-term capital, or equity. Long-term capital is the money you need to meet fixed, ongoing, and long-term costs such as a marketing budget, employee salaries, and equipment leasing. It’s important to have enough equity in your business, too.
Why do I need working capital?
Working capital is the lifeblood of your business. Your working capital keeps your employees on board by paying their salaries. You use working capital to keep your warehouses stocked by buying more inventory. Most of all, working capital is what you need to deal with unexpected and unforeseeable expenses. You’ll need working capital to pay your tax bill or bring in workmen to fix a broken window.
How is working capital different to other money in my business?
The main way that working capital is different from your other business assets is that it’s accessible. By definition, working capital is money that you can use whenever you need it, without waiting 30 days for it to be released from a savings account or hoping that a client pays up soon.
How can I calculate my working capital?
In order to keep your business running smoothly, you need a realistic capital management system. The first step is to know just how much working capital you have available. Here’s how you determine this figure:
- Add up all your current assets – the things you own which could be converted into cash fairly quickly. These include accounts receivable, inventory, and cash.
- Add up all your liabilities. These are the things you need to pay in the next 6 or 12 months, such as your staff payroll, utility bills, or short-term loan repayments.
- Calculate your working capital by subtracting your liabilities from your assets.
Components of Working Capital
Working capital has two main components, assets and liabilities. These can be further broken down into several elements and typically all of them are found on the company’s balance sheet.
Current Assets
Assets are the holdings of a company or a firm that can offer economic benefits in the next 12 months. These include:
- Cash and Cash Equivalents
- Inventory
- Accounts Receivable
- Prepaid Expenses
Current Liabilities
Simply put, liabilities are the collection of debt that the company owes in the next 12 month. These can include:
- Account Payable
- Wages Payable
- Current Portion of Long-Term Debt
- Accrued Tax Payable
- Dividend Payable
What is a working capital cycle?
It’s also important to be aware of your working capital operating cycle. Simply put, this is how long it takes for your money to come back to you when you buy and sell products.
Here’s an example for an online retailer selling kids’ toys.
- On day 1 of your operating cycle, you order a shipment of toys from your supplier.
- The toys arrive in your warehouse on day 10.
- You succeed in selling all the toys by day 15.
- Your customers pay by credit card, so it takes a few days for the payments to clear. Their payments arrive in your account on day 22.
- Your operating cycle is 22 days
That means that from day 1 to day 22, you can’t access your working capital because it’s tied up in your inventory and sales process.
How much working capital do I need?
It is possible to have too much working capital. If you have extra working capital that isn’t needed, it’s a sign that your money isn’t working hard enough for you. Businesses that have surplus working capital look unsuccessful, because it seems as though they’re missing out on business opportunities. Having too much working capital can even impact on your credit rating.
Keeping the right amount of working capital can be tricky. All small businesses want to know how much working capital they need, but it’s impossible to give one single answer for every business. Issues to consider when you’re answering the question of “How much working capital do I need?” include:
- How long does it take for my customers to pay? If you have to wait a long time, you’ll need more working capital to cover the gaps till their payments come through.
- How long is my working capital operating cycle? The longer the cycle, the more working capital you need to hand.
- Do I want to grow my business? If you want to grow your sales, you’ll need more working capital to fund your expansion. If you want to keep everything stable, you’ll be fine with a lower working capital amount.
How Can Capital Advance Help With Working Capital Problems?
Capital Advance is a service launched by Payoneer which offers a solution to problems with working capital. It offers capital up to 140% of accounts receivable or $750,000. What makes this service excellent for the working capital is that it is transferred into the account instantly.
The terms and conditions of Capital Advance are quite simple and friendlier than other platforms with similar services. Payoneer charges a small fixed percentage of the total amount and that is it. There is nothing more that the businesses have to pay in addition to this fee and the Capital Advance amount.
Don’t forget: Cash is king
Now you understand what working capital is, you’re ready to calculate your average working capital availability each month and consider how much you need. If your working capital isn’t enough for your needs, the Payoneer Capital Advance solution can help you instantly boost your working capital.
Payoneer customer? View your Capital Advance offers now!
New to Payoneer? Learn more about Capital Advance
FAQs
What Are the 4 Main Components of Working Capital?
Working capital mainly depends on four components which include inventory, account payable, account receivable, and cash or its equivalents.
What is a Good Percentage of Working Capital?
The ideal amount of working capital varies for different industries and the nature of businesses.
What is a Good Working Capital Cycle?
A good working capital cycle is one where businesses have a window where they can wait to receive payments and generate cash for expenses. Typically such cycles are short which means the cash is not tied up with the suppliers or customers.