Female customer paying business owner at the cash registry, to illustrate the idea of "working capital"
Betsy Wise
By: betsy_wise
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What is Working Capital for Small Businesses?

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Ensuring that your small business moves forward or starting a business can be a scary proposition. While building your business from the ground up, you may think, “What is working capital, anyway?” Is the business concept as straightforward as it sounds or is there more to it than meets the eye?

Fortunately, Camino Financial knows it takes a village to grow a business. We’re here to help you sort through business concepts and fund loans so your business remains stable and positioned for growth.

Understanding the ins and outs of working capital is how you reach your business and personal goals. By optimizing its influence on profitability, you can successfully manage your business’s cash flow.

 

How Do You Define Working Capital?

Also referred to as networking capital, it’s a simple working formula to maximize profits. In simple terms, you itemize your assets and subtract from that total your current debts.

Putting your assets (e.g. inventory, accounts receivable) and liabilities (e.g. credit card debt) on paper is similar to getting a checkup with your physician. At a glance, you can see how healthy your business is financially speaking. Then, it’s easier to adapt your working capital to accommodate seasonal upsurges during your business cycle. Plus, you can determine in which areas you tend to overspend. You soon discover your business’s financial health continually changes, which is normal.

There’s a way to identify if your assets and liabilities work together in harmony. A comparative number called a working capital ratio helps you make that determination.

 

What Is a Working Capital Ratio?

Small business owners already know that assets must exceed liabilities in order to realize a profit. If the margin between the two is too close, your business suffers. A good working capital ratio (current assets/current liabilities) is considered anything between 1.2 and 2.0.

By keeping tabs on this ratio, you can quickly assess whether you need to tweak your business plan or make other adjustments to cash flow. Remember, there are numerous options at your disposal to improve your company’s financial health. To know more about how to grow your business, in what areas are you failing or which ones can you improve, you can take this simple quiz: it is a growth evaluation that will only take you a few minutes. It’s free and you don’t need any additional documents to complete it. In less than 72 hours, you will receive a report with everything you need to know to start transforming your business.

 

How Does Working Capital Work in the Real World?

  1. Upfront payments: By receiving a deposit or full payment upfront, you keep your finances on an even keel as you complete projects for your customers. Some business owners use this method with new clients since they haven’t established a credit relationship. Moreover, these types of payments cover ongoing expenses. If your business provides an immediate service or product to your clients (think of a retail store, for example), most probably you require an upfront payment from your clients.  
  2. Payment in 30 days: Manufacturing companies and businesses in the labor-intensive construction industry normally set up a 30-day payment schedule with customers. As work is completed throughout the month for different customers, payments come in each week throughout the 30-day period. This boosts your cash flow and prevents you from borrowing money.
  3. Cash: A consumer-focused industry like food and beverage keeps a close eye on the available cash. Many of these industries work with suppliers to extend payment beyond 30 days during upswings and downswings and keep inventories as lean as possible. Because the demand for products that consumers use regularly is high, it’s possible to double annual revenue by focusing on strategic cash management.

What Types of Capital Sources Fund Your Working Capital Needs?

Maybe you’re already thinking, “How do I implement working capital to achieve financial success? The way you streamline your day-in and day-out operation helps provide a cushion of available funds. Here are five sources of capital that safeguard your cash flow so there’s money left over for growth.

  1. Lines of Credit: Sometimes no matter what you do, businesses endure temporary slumps. To ride out these low cycles, short-term loans shore up your business’s financial health. With a business line of credit, you can advance cash as needed. The lender needs revenue data information to ascertain performance and set a credit limit for working capital. In most cases, you can transfer funds into your account using a checking account or even a secure mobile app.
  2. Equity: It’s a common practice for small business owners to make personal contributions to their businesses. The owners can make contributions and be paid back when there’s a net gain in retained earnings. Furthermore, other family members and third-party investors may also agree to contribute money to build up your business’s equity.
  3. Business Credit Cards: For convenience, credit cards are designed specifically for small business usage. Your available credit limit will depend on credit scores and current financial statements. Many business credit cards offer business rewards like airline bonuses, no annual fees, and cash back on select business purchases. Interest rates may be at a fixed lower percentage rate for a specified time and variable rates thereafter. However, business credit cards come with a drawback: be aware that rolling over more than 30% of your credit card limit every month will hurt your credit.
  4. Trade Creditors: You can delay payments for goods and services by working with trade creditors. You’re able to manage short-term cash flow without using personal funds to actualize growth. The flexible arrangement allows you to work out credit terms tailored to your business needs. This provides some wiggle room in your budget when your accounts payable aren’t due until 60 days out. Even though you can always pay off debt sooner, having additional time for payables is advantageous. For instance, your business may have a slower month or unforeseen operating expenses could crop up.
  5. Factoring: New businesses sell their accounts receivable to third-party factoring companies. This way you receive cash immediately as the third-party companies purchase your accounts for cash at an agreed rate.
  6. Online Term Loans: Online lenders make funding easy so you don’t experience any downtime in your finances. Different from traditional bank loans, online term loans are more convenient as you apply from the comfort of your home or office, the process is much shorter and they come with some extra perks. For example, Camino Financial offers 24-60 month loans that you can repay fully at any time without incurring fees. The company also has a mobile-friendly application to accommodate busy lifestyles.

A working capital loan is the best choice for many small business owners. Learn here more about working capital loans.

How Can Camino Financial Fund Your Working Capital Needs?

Camino Financial is a family-owned small business. We know what it feels like to go up against other competitors and to manage capital so a business thrives. Our mission, “Never Leave a Business Behind” is heartfelt and fuels our passion to help other small businesses.

  • The Process: Our simple and quick application process only takes 4 steps. Basically, you just have to complete a simple loan application and authorize Camino Financial to download the last six months of bank activity. Depending on your credit profile or the loan size, your assigned business loan specialist may request additional documentation. Approved loans are normally funded within 4-10 days.
  • The Product: Small business loan amounts range in size from $5,000 to $400,000 with interest rates averaging between 12 to less than 30 percent. Pre-qualification is built into the loans so your credit score is not affected. These unsecured loans don’t require collateral as part of the loan process.
  • Success Stories: Camino Financial beams with pride every time we hear yet another success story. Take for instance Baldemar’s journey. He went from working in a coal mine to excelling in a small business that installs and repairs equipment. He learned first-hand what it means to work with a lender that is —all in— to help businesses grow. Other success stories abound including how Oscar increased his credit score by 50 points.

Ready to take the first step to access capital and grow your business? Apply today for a small business loan and get a free quote. This won’t affect your credit.

Final Thoughts about Working Capital

It doesn’t take long to transition from “What is working capital?” to “Sign me up!” It’s a huge relief to know you can control your cash flow to strike a balance between work and family obligations.

At a moment’s notice, you want to have enough assets built up to use as available operating capital. Your goal is to have sufficient assets to cover any short-term debt and unexpected expenses. To achieve that measure of success, you can monitor your working capital ratio and take steps so that your business stays in the black. By taking a proactive stance relating to your business finances, you’re able to see a return on your investment as quickly as possible.

Whether you have available cash or use a loan program offered by Camino Financial, consider setting up a rainy day fund to plan for future expansion. This planning fund may cover items like adding on an additional building or renting a larger space. You may want to upgrade your business software, purchase newer furniture, or invest in technology that gives you an edge over competitors.

Monitoring your working capital is an important way to maximize profitability and avoid losing credibility with lenders or customers. As many business owners know, opportunities arise quickly. By keeping a steady and reliable flow of cash, you can make financial decisions without worrying about whether there’s enough money in the till. You’ll no longer need to sidestep the slow dance between having too much or not enough working capital.

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