This Is How To Determine Your Working Capital Needs

This Is How To Determine Your Working Capital Needs
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One of the most difficult to understand financial concepts is working capital. Working capital is a fancy term that refers to the efficiency and financial well-being of a company. The amount of money that a business organization needs in order to function properly depends on the type of entity that if formed, the operating cycle, and what you hope to achieve in the future. This basically means that every businesses need are different. The question now is: Are you capable of determining yours? If you are oblivious when it comes to such matters, you might find this information helpful.

The operating cycle

When determining your working capital needs, it’s necessary to take into account your operating cycle. The operating cycle basically refers to the amount of time necessary to purchase inventory, transform it into sales and generate profit. The number of days it takes your company to get customers to pay their financial obligations is determined by taking the number of sales and diving them by the number of products that you have in stock. It’s impossible for business organizations like yours to support the operating cycle with just accounts payable financing. You need cash to rely on. Even if you bill customers for products and services that they have already acquired, you need cash at your disposal in the event that they don’t pay their invoices on time.

The nature of business

The nature of business that you are running bears a great significance. If you have physical inventory, you will require more money. On the other hand, if you are a service organization, the services that you provide are only on a cash basis. This translates into the fact that you don’t need as much working capital as other businesses. It’s important to note that organizations that make money from seasons need very low amounts of money. The point is that you are the only one who knows what your company needs and what it doesn’t needs.

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You have to understand your current and your future needs. Maybe with time, you will want to expand, case in which you are going to need money. The important thing for you right now is to plan ahead of time. There is nothing more important than the financial health of your company. The last thing you need is to be caught unprepared. If you didn’t know about now, strategic planning is what leads to business growth.

Working capital financing

If you are in need of working capital, you will be happy to know that there are many financing options. Simply put, you can take out a loan. These are the most common type of working capital loans are:

  • Short-term loans
  • Accounts receivables loans
  • Factoring
  • Equity funding

Even if you aren’t tempted by the idea of borrowing money, at some point or the other, you will have no choice. The good news is that obtaining funding isn’t difficult or complicated. Ou can secure a working capital loan.

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Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at [email protected]
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