Working,Capital,for,Business,N business, insurance Working Capital for Business

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Normal 0 false false false EN-US X-NONE X-NONE /* Style Definitions */ table.MsoNormalTable{mso-style-name:"Table Normal";mso-tstyle-rowband-size:0;mso-tstyle-colband-size:0;mso-style-noshow:yes;mso-style-priority:99;mso-style-qformat:yes;mso-style-parent:"";mso-padding-alt:0in 5.4pt 0in 5.4pt;mso-para-margin-top:0in;mso-para-margin-right:0in;mso-para-margin-bottom:10.0pt;mso-para-margin-left:0in;line-height:115%;mso-pagination:widow-orphan;font-size:11.0pt;font-family:"Calibri","sans-serif";mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin;mso-fareast-font-family:"Times New Roman";mso-fareast-theme-font:minor-fareast;mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;}One of the greatestneeds that small businesses have is the need for working capital. Working capital is the lifeblood of the business,the fuel that funds the daily operations and ability to pursue near-term growthopportunities for the business. Working capital is officially defined as “….”.The financial equation for determining working capital is as follows:(Accountreceivables + inventory + cash on hand) – (Account payables + prepaids)  There are numerous sources of working capitalfor businesses.  Looking at the equation,one way to obtain additional working capital is to increase account receivables(i.e., sell more) or convert the receivables to cash by getting customers topay sooner.  Continuing to examine theequation, another way is to increase inventory. When examining a company’sbalance sheet for the purpose of acquiring that company, it is important toexamine how these parameters fluctuate as part of the working capital. Acompany can increase inventory and receivables significantly, drasticallyincreasing the amount of “working capital” denoted. However, those receivablescould be essentially non-collectible and the inventory could be obsolete.  Either of these would essentially nullify theadvantages of a large “working capital”. You canaccess cash by getting customers to prepay their orders by offering significantdiscounts for doing so. For example, if a customer buys a monthly service for$100, you can offer them a yearly pre-paid, discounted rate of $1,000. That’sroughly 20% off but when you factor in the time value of money, the discountdrops by 5-8% (depending on your internal rate). If you sell much largerservice contracts or products, the difference in actual cash can be profound withprepaids. On the other side of the equation, you can get your supplier(s) toextend terms. Instead of payment expected within 15-30 days you may be able topush payment out to 90 days. You never know unless you ask.From theperspective of the company owner, the larger the proportion of working capitalin cash, the better. Cash can be spent on anything – to pay suppliers, payemployees, pay rent, pay for geographic expansion or product line development.Receivables and inventory not quickly converted to cash through turnover mustbe converted to necessary cash via financing that uses either or both of thesetwo as the collateral for loans. Workingcapital for business is something many small business owners do not plan. Theyoften do not think about it until they encounter a cash crunch. Or sometimes,not until they have encountered a number of cash crunches and are tired of thestress of not knowing how they’ll make payroll or pay irate suppliers. Some ofthe myriad sources of financing workingcapital for business include short term asset-based lines of credit, termloans, equipment loans, signature credit lines, supplier financing or extendedpayment terms, economic development grants, and factoring. Typically loansagainst receivables and inventory are short-term lines of credit, renewableannually. Some banks and other financing institutions will extend a term loanfor three to five years against high grade collateral. (i.e., Accountsreceivables that typically pay within 30-45 days and are with highly creditworthy customers and inventory that is replaced within a similar time frame.)Theimportant thing is to continually keep in mind what “working capital” is andwhat goes into it. It is vitally important to track your business cash and howquickly your company converts its short-term assets to cash. Not doing so canresult in a significant shortage in working capital and, in short order, aliquidity crisis. If your company qualifies for a line of credit, get one. Youdon’t have to use it but you should have it on hand to use in case of a crisis.I have had clients who have lost major customers to bankruptcy. Thatunfortunate scenario occurred more often in 2010 and 2009 than in previousyears but it could happen anytime. If your customers have large outstandingreceivables that are close to 90 days, your exposure to such a scenario isdrastically high. Even if your risk is low, when a customer cannot or will notpay receivables in a timely manner, where will your cash to run the businesscome from while you deal with the problem? Plan for the future and track yourworking capital. Your business will thank you for it in the form of strongerfinancial health. Normal 0 false false false EN-US X-NONE X-NONE /* Style Definitions */ table.MsoNormalTable{mso-style-name:"Table Normal";mso-tstyle-rowband-size:0;mso-tstyle-colband-size:0;mso-style-noshow:yes;mso-style-priority:99;mso-style-qformat:yes;mso-style-parent:"";mso-padding-alt:0in 5.4pt 0in 5.4pt;mso-para-margin-top:0in;mso-para-margin-right:0in;mso-para-margin-bottom:10.0pt;mso-para-margin-left:0in;line-height:115%;mso-pagination:widow-orphan;font-size:11.0pt;font-family:"Calibri","sans-serif";mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin;mso-fareast-font-family:"Times New Roman";mso-fareast-theme-font:minor-fareast;mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;}Bio: Tiffany C. Wright is Presidentof Toca Family Business Services, a strategic advisory firm that providesinterim CEO, COO and CFO services.  Sheis the author of Solving the Financial Equation: Financing Solutions for SmallBusinesses, available at Amazon.com, and HELP! I Need Money for My BusinessNow!, available at http://www.smallbusinessfinancingresource.com. In the lastfive years she has helped companies raise over $31 million. View her blog athttp://blog.smallbusinessgrowthcapital.com.