What is working capital?

The expression “working capital” indicates the basic values ​​that a given company needs to move during a given period. It is the money available in cash so that the company can make investments or purchase materials after paying off its obligations.

Working capital is not just about the cash that your company has. It also takes into account the values ​​you have to receive and the values ​​you have in stock. From all these variables, we arrive at a formula for calculating working capital.

How to calculate the amount of working capital that your company needs?

In a simplified way, we can calculate the working capital of a company as follows:

(Amount of all your accounts receivable + amount you have in stock) – (total accounts payable + total payable in taxes and expenses)

We have four factors here. On the one hand, the sum of your unavailable capital, which includes amounts that you will still receive (and that are already billed) and the products that are in your inventory. On the other, the sum of the amounts you have to pay, which includes the usual bills, taxes and other expenses.

The result of this calculation is the amount needed for your business to operate for a certain period, that is, your working capital.

How to obtain financial resources to form working capital?

Now that you know exactly what it is and how to calculate working capital, it’s time to learn how to obtain financial resources to increase it. It is common for companies to not be able to wait until a certain amount is available, as there are  debts to be settled immediately, there are contingencies and even investment opportunities. It is at this time that other possibilities for obtaining capital immediately come into play. Know which are the most common.

1. Anticipation of receivables

This is one of the most common ways of raising capital adopted by companies that have a lot of credit sales or subscribers. You can look for a financial institution and give it part of your receivables, that is, the invoiced contracts you have to receive, in exchange for anticipating the amounts.

For example: suppose that in the next three months, the sum of the amounts you have to receive is equal to R $ 50 thousand. A financial institution can anticipate this amount for you, by charging interest and a risk fee. In return, the amounts receivable, when paid, are transferred directly to the bank.

Each case must be analyzed individually, but basically the question you should ask yourself is: is it better to have R $ 45 thousand available today or R $ 50 thousand available in three months?

2. Bank loans

If you do not have receivables or do not want to commit them, another possibility is to use bank loans. The amount borrowed will be converted into immediate working capital, but in the medium and long term it will be included in the list of expenses to be paid.

For this reason, care must be taken with this choice. It must also be analyzed on a case-by-case basis and may be worthwhile to cover specific debts or for investments. However, try not to become dependent on this type of mechanism, as there is a great risk of it becoming a snowball.

3. Business financing

Corporate finance lines are similar to bank loans, but they tend to have more attractive rates or longer terms for settlement. In this case, financial institutions make credits available for specific purposes, such as buying cars or real estate.

Likewise, financing initially strengthens your company’s working capital, but in the medium and long term it is included in the list of expenses. If there are attractive and specific lines of credit that suit your needs, they are worth choosing.

4. Sale & Leaseback

This is a form of financing available to companies that have their own property. In this modality, the company “sells” its property to a financial institution, which immediately transfers the corresponding amount in cash.

However, it starts to pay a kind of “rent” for the property for a long term, which can reach up to 20 years. At the end of this period, all installments are paid, the company recovers the property. This is considered a drastic measure, but it can be an interesting option at times.

5. Secured account

The guaranteed account is a kind of “overdraft” for companies, but with lower rates. The idea is simple: you can search for the bank in which you have an account and request an increase in the available limit. In return, it offers guarantees, such as receivables or duplicates.

Payments are made month by month, with direct debit to your checking account. Keep in mind that to apply for this type of credit you need to have your company accounts organized. From the bank’s point of view, the greater the risk, that is, the more difficult it is for your company to pay off the debt, the higher the interest.

Why is it important and how to manage working capital?

With the explanations above you have certainly realized that working capital is a fundamental part of your business. Without it, any unforeseen event may result in your company not being able to honor its debts, which can result in fines, interest, foreclosures and, in the most extreme cases, bankruptcy.

Therefore, managing your working capital is essential so that problems of this nature do not occur. At the slightest sign that something is wrong you can resort to the following alternatives:

  • Cut spending:Often, the best way to get more money is not by borrowing or financing, but by cutting spending. Reevaluate your accounts payable and decide if all the items there are really essential.
  • Review processes:there are many ways to do the same thing, and the one you are using may not be the cheapest. It is common for companies to resort to outsourcing certain activities as a way to reduce costs, for example. Automating certain tasks can also have a positive financial impact.
  • Negotiate with suppliers:companies that do business with you can be partners in difficult times . They may offer longer payment terms or even greater discounts depending on the time you work with them. If you are on the verge of paying off a debt and do not have enough money, do not let it be executed and try to renegotiate it before maturity.
  • Control cash flow: capital inflows must always be equal to or greater than outflows for your company to remain sustainable. If this is not happening, then you need to look carefully at the first two items on this topic. Keeping track of your finances day by day allows you to reach conclusions like these and can act quickly, before the situation gets complicated.

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