The Working Capital Guide for Small Business Owners | Behalf
Understanding working capital for small businesses is not that simple. There are resources all over the internet that can help you calculate working capital, but if you don’t understand the meaning behind it, those resources are useless. Technically, small business working capital is the amount of liquid assets available to fund daily operational expenses. You may hear it explained as your business’ current assets minus its current liabilities:
(Current Assets) – (Current Liabilities) = (Net Working Capital)
This calculation can result in a positive or negative number, depending on the balance of assets and liabilities in your business. Therefore, it is indeed possible for your business to have positive or negative working capital. This article explains how working capital functions within your business and what it means to have positive or negative working capital.
The Working Capital Cycle For Small Businesses
In order to understand how working capital functions, let’s take a look at how it moves. Working capital cycles through your business. The working capital cycle breaks down into 4 parts: cash, creditors, inventory, and debtors. It covers the duration of time between buying inventory and selling products. In other words, the working capital cycle refers to the time it takes to convert current assets and liabilities into actual cash. Working capital cycles vary in length. If your business has a shorter working capital cycle, it is more effective. In contrast, an excessively long working capital cycle is ineffective because it ties up cash in the operational cycle, instead of earning returns. As a result, businesses become financially distressed because they cannot use the cash they technically have.
Positive vs. Negative Working Capital
Depending on your business’ financial status, you could have positive, negative, or neutral working capital. It’s easy to assume positive working capital for small businesses is good, while negative working capital is bad. However, if you’ve learned anything about working capital for small businesses so far, you now know it is never a black or white issue. The truth is negative working capital does not negatively impact all businesses. Though negative working capital is typically a source of financial distress to small businesses, it does not pose a threat to large companies that can easily raise money whenever they need it.
At the same time, having positive working capital does not necessarily mean your business is on solid footing. Depending on your business model and industry, you will need a certain amount of positive working capital to sufficiently cover operational expenses. For example, a department store will require more positive working capital than an eCard trading service. The latter does not sell a physical product so they have lower operational expenses. Firms that are in volatile business climates or have high operational costs require a much larger working capital buffer.
Even healthy businesses need the occasional boost in working capital. There are plenty of financing options available online, but you want a lender that offers flexible, affordable financing. Behalf offers a business purchasing line of credit with exceptionally flexible payment terms, allowing you to extend payment for up to six months on a customized schedule. Our line of credit can increase your business purchasing power up to $50,000. With no hidden fees, you can use your Behalf business line of credit to fund on-going operational expenses at an affordable 1-3% monthly advance fee. More than half of Behalf customers say their Behalf financing rate is lower than their credit card’s.