Maintaining Positive Working Capital
How Does Invoice Factoring Create Working Capital?
When so many small businesses fail due to the lack of working capital, its importance cannot be underestimated. Understanding the amount of working capital that your business needs to run its operations is essential. In this article, we will explore the definition of working capital, how to calculate how much you need, and how invoice factoring creates critical working capital.
When working capital acts as the wheels that make business operations turn, keeping healthy, stable capital becomes possible when you properly inform yourself and your business. Negative capital is a death knell for your business.
How Is Working Capital Defined?
If you read your balance sheet, working capital is defined as a business’s current assets minus its current liabilities. Current assets can be cash, accounts receivable (AR), checking and savings accounts, and any asset that can be converted to cash in a year or less. Current liabilities can be accounts payable, short-term loans, rent, utilities, tax payments, and any liability that is due within a year or less.
For businesses to confidently meet their financial obligations, especially small businesses that have less wiggle room, having a positive working capital calculation is of high importance.
How to Calculate Working Capital Ratio
With so much diversity between the sizes of businesses, there is no single “one-size-fits-all” number value for working capital needs. Because of this, using a ratio value for measuring it makes the most sense.
The formula for the working capital ratio is Current Assets / Current Liabilities.
Between the values of 1.2 and 2.0 is considered a healthy ratio. Any lower than this range, and you may find yourself having a hard time properly meeting your financial obligations. Any higher than this may seem like a good thing; however, it could be a sign that your business is underusing your resources.
Turned down for a business loan? Read our article on how to obtain financing after business loan denial for advice even with a low credit score.
How to Calculate Working Capital Requirement
So, how do you know how much working capital your business needs? Calculating your working capital requirement, or WCR is a great place to start. Your WCR value will help you to understand how much your business needs to maintain operations while fostering further growth.
The formula for WCR is Inventory + Accounts Receivable – Accounts Payable. Let’s learn about managing working capital for day-to-day operations.
Your WCR shows how much cash you need to cover operational costs between payments for goods. It’s important to have enough working capital to sustain your business and support growth.
How to Calculate Working Capital Cycle
The working capital cycle, or WCC, measures how many days it takes for your current assets to become cash. This value allows your company to predict and manage your cash flow and understand its typical cycle.
The formula for the working capital cycle is Inventory Days + Receivable Days – Payable Days.
With the figure from this formula, you are able to interpret the timing difference between sales and payment. A positive WCC indicates that your business needs to wait for payment before purchasing products for resale, and a negative WCC indicates that your business is able to receive payment from the product sales before paying those products’ invoices.
Learn about traditional loans vs invoice factoring and how invoice factoring provides greater accessibility in maintaining positive net working capital.
How Does Invoice Factoring Create Working Capital?
While working to take back control of your finances and calculate your working capital needs, a problem you may find yourself running into is waiting for payment. When your business finds itself continuously stuck on invoices with 30-90-day payment terms, this can create significant gaps in cash flow, creating difficulty with meeting operations and supporting your business.
Consider invoice factoring as a creative, innovative funding option that takes your unpaid invoices and transforms them into quick, easy working capital. This simple, accessible process bridges your gaps in cash flow and allows you to meet your working capital requirements with ease.
Learn more about the process of invoice factoring with our comprehensive guide to invoice factoring as a financing option.
With a short, simple approval process and the remarkably quick turnaround of same-day funding after approval, Bankers Factoring allows you to leave the headache and stress of slow payment in the past, helping your company to grow and thrive.
Further questions on invoice factoring? Visit our invoice factoring FAQ and learn more about how Bankers Factoring works for you.
Working Capital Security with Bad Debt Protection
As a small business, every sale you complete is completely essential to your financial health. In this case, the possibility of the threat of non-payment can feel looming, lingering in the back of your mind, and creating additional stress.
If this worry has ever plagued you, you can now rest easy. Bankers Factoring is proud to offer true security to your company with non-recourse factoring. Non-recourse factoring means that if your customer becomes unable to pay their invoices thanks to credit issues, Bankers Factoring will absorb this loss for you.
With non-recourse factoring, you are now protected from the threat of non-payment, and you are able to maintain confidence that non-payment will not impact your working capital cash flow.
Learn more about understanding non-recourse factoring and how Bankers Factoring protects you.
Receive Capital with Bankers Factoring
Get to know the benefits of factoring your invoices and creating immediate, safe, and reliable critical working capital with Bankers Factoring. With our award-winning services, financial security is never far out of reach.
When your working capital impacts every aspect of your business, there is nothing more important than your financial health.
As business owners ourselves, we have a genuine interest in wanting to see you truly succeed with:
- Easy, quick application process with easy factoring qualifications
- Clearly defined terms and conditions
- Transparent low rates you can calculate on a napkin
- Factoring is cheaper than swiping a business card
- Bad debt protection with non-recourse factoring
- Famous Bankers’ light touch with your customers
- Higher accessibility than traditional funding options
- SBA loan turndown specialists
- Turn good invoices into same-day working capital
- 24/7 online reporting portal
- Access to our decades of knowledge and expertise
- Fees that drop as your business grows