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, your business might have to fold.
We explain all you need 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 the unexpected. You’ll need your 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.
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.
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.
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