Learning more about working capital financing

One of the best methods to keep your business running effectively is by using working capital financing. Working capital financing helps you to remain in business as you use your short term assets and short term liabilities in order to keep your business running.

The formula you need to follow in order to come up with your working capital number is to subtract your current assets from your current liabilities. What are your current liabilities include are your bank overdrafts along with all of your tax liabilities. When you have trade creditors to worry about, they are also considered part of your current liabilities that can impact your bottom line. Your current assets are all of the inventory items you have to sell along with your raw goods and work in progress items. By subtracting these numbers you will be left with your working capital number. This number is the money that allows your company to run on a day to day basis.

You must be able to optimize your working capital correctly in order to avoid large finance charges when you ask for money. Banks are going to be very cautious about providing you with a loan. They always look over your working capital in order to see if you need less or more and to determine what your interest rate is going to be. They commonly refer to this as your "liquidity ratios".

A company wants to have a positive working capital amount as it shows that your company is strong enough to pay for everything and to have lower liabilities from your assets. You will have assets that are strong enough to provide for the business when you have to sell it or when you are in need of financing and these assets are able to provide you with the security you need along with the stability a lender needs to provide you with the loan.

Having negative working capital is very dangerous. It means that your business is going to struggle and that you aren't going to have the security lenders are looking for in order to finance your business. What you can do to help yourself is to really study your company's cash conversion cycle. The cash conversion cycle is what shows a picture of your company's working capital requirements and needs.

What the cash conversion cycle helps you to see is how long it's taking your customers to pay you. When you sell a product how long does it take for them to pay off the invoice? Are they taking advantage of your company's credit terms? Longer cash conversion cycles will lead to a lot of financial stress on your company and it makes it very challenging for you to be able to have the money you need to pay your vendors and to have any type of negotiating power with other vendors in the future. What are some ways in which you can speed up the payment process? You need to start charging your customers interest on the amount of money that they credit from your company. Another thing you may want to is to start getting your customers credit card information and to enroll them in automatic monthly payments.

When you do not have control over your company's finances and you aren't watching the books effectively you need to be careful because it won't be long before you have overdrafts and other things. Cutting a check to your vendors isn't going to do much if there isn't any money in the account to pay for the company needs. When credit gets tight, the last thing you should do is to jeopardize your business by getting overdrafts and to start ruining your credit.