Capital for Business | Payday Loans

Capital for Business | Payday Loans

 

 

 

The words “working capital” have already fallen into popular tastes, turned into everyday slang. But the fact is that most people do not really know what they mean. All kinds of business organizations work on the basis of working capital, it is he who makes the operation work. In this text we will make a brief introduction to the topic and explain some related issues.

What is working capital?

 

 

Before touching on the main theme of this article, it is necessary to explain the concept of capital. Think of a car, for most people it is just a consumer good, but for those who work with transportation, it is a capital asset. The money used on a day-to-day basis is only currency for consumption, but when we invest it, it becomes a capital asset.

Capital goods are necessarily those used in the production of other goods and services. The capital of companies can be divided into two categories: fixed capital and working capital. Fixed capital is the one that stays in the company for long years, like machines, vehicles, titles, etc. Working capital is the one that is used in the short term as cash and products.

Working capital is expressed in monetary units, since it is used to pay suppliers, employees, taxes, etc. Companies can obtain working capital from different sources, from members’ contributions to bank loans.

What are the sources of working capital?

What are the sources of working capital?

 

There are 3 basic sources of working capital, we will explain each of them in the following lines:

  • Equity: Part of the partners’ money is used to acquire equipment, real estate, etc. and another part is used for cash formation, or, working capital;
  • Third-party financial capital: Companies may take short-term loans to finance their operations or otherwise discard securities in development funds. In this way, they use third-party capital to spin the cash.
  • Third-party operating capital: There are companies that manage to work with payment periods much higher than those received. Companies that can do this can work with the capital of their customers and suppliers.

The first two sources of working capital are the so-called costly sources, that is, they generate financial costs for the company. In the case of third-party capital, the cost is the fee charged on interest. In the case of equity, the price paid is the opportunity cost relative to the amount.

When the company can obtain capital via the third way, there are no financial costs involved, since it has excess cash. However, entrepreneurs need to assess whether lengthening deadlines is not driving up supplier prices. It should also be checked whether cash receipts are obtained at the cost of large discounts.

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How can companies improve working capital management?

How can companies improve working capital management?

 

The best way to improve working capital management is by first organizing your company accounts. It is not good to mix accounts of the partners with those of the firm and nor with extraordinary payments. The cash of the company must circulate only resources related to its operation.

As for the operationalization of working capital, it is obvious that companies that have their own resources face less risk. However, if the company needs to keep a lot of cash, this reduces its profitability. This is because it is necessary to increase the assets employed in the operation, without necessarily occurring, a proportional increase of profits.

The most efficient way of working the working capital is negotiating the shortening of the terms of receipt and lengthening the payment deadlines. The big retailers are experts in this type of activity, they buy products to pay on very long terms and sell with shorter deadlines.

Obviously, raising the balance of accounts payable increases the risk of the company. However, if the default rate is low, there will be no problems. The combination of long payment terms, short delivery times and low delinquency is the perfect liquidity recipe.

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How to measure the amount of ideal working capital for the business?

How to measure the amount of ideal working capital for the business?

 

The amount of working capital required is given by an index called the NCG (need for working capital). The index measures the volume in currency, necessary to keep the company in solvency. The NCG is given by the difference between current operating assets and current operating liabilities. Let’s understand what each of them is:

  • Current Operating Assets – Sum of all short-term receivables (trade notes, checks, card sales, etc.) and inventories.
  • Current Operating Liabilities – Sum of all short-term liabilities of the company, such as salaries, payments to suppliers, taxes, rents, etc.

The need for working capital will be given by the formula: NCG = ACO – PCO.

To understand better, we will see the example of company X. If in the month’s balance sheet, the manager realizes that there is an average of R $ 30,000 to receive and R $ 45,000 to pay, it will have an NCG of R $ 15,000 negative. So, you need to have exactly $ 15,000 in cash to make the business run under the current conditions.

The NCG of R $ 15 thousand is the minimum size of working capital required by this company.

Read more here about negotiating deadlines

How to get working capital quickly and cheaply?

 

Until recently, obtaining third-party working capital was only possible through traditional banks. The problem is that these banks charge high fees and their bureaucracy is discouraging.

To solve this problem, fintechs emerged , companies that combine technology with financial services. Some, like Biz Capital, offer loans for working capital in a simple, quick and much cheaper way than in the traditional system.

Conclusion

 

Inadequate management of working capital is one of the main reasons for corporate failure. There are entrepreneurs who are good at what they do and act in good markets, but they end up sinning in financial management. Mathematics does not forgive anyone who neglects working capital, if money is lacking, the company does not resist. It is therefore ideal for managers to obtain this important feature quickly, simply and of course cheap.

 

 

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