A common mistake many newly started companies make is not to handle the working capital enough and improve cash flow at an early stage. It is usually worth taking a closer look at this for most companies, and especially newly started ones, since optimizing working capital can be crucial for a company’s success and growth. Read about the definition of working capital and get ideas on how you can improve it, already in the short term!
Companies who want to grow may need to release capital
In order to optimize the cash flow one first needs to understand future needs, debts and incomes, as well as consider a temporary increase of the working capital. The working capital has a great effect on many parts of the company, from salary payments and payments of potential supplier costs to rent, utilities or new projects and future investments. The definition of working capital is often simplified to only include the amount of money available to address short term commitments. But what working capital really means in detail, and why optimizing free capital is important för newly started companies in the growth phase, is explained here below.
Working capital - the definition
The term working capital describes the difference between a company’s short term debts and its current assets. It consists of:
- cash and cash equivalents
- advance payments made
- current liabilities
- advance payments recieved
The working capital evaluates a company’s capacity to pay its short term debts with its current assets while giving an indication of the company’s short term financial health. The ability to pay debts within a year, liquidity and operative efficiency can also be derived from this. To be aware of the importance of optimized working capital and its influence can be a crucial competitive advantage in a market.
Calculating working capital
The working capital is calculated by dividing current assets by current liabilities, creating the formula:
Current assets/Current liabilities = Working capital
An outcome over 1 means the company’s assets can easily be turned into cash and that the company can be considered to have enough capacity to pay its short term liabilities with its current assets. The higher the number, the more likely it is that a company can meet its short term liabilities and debt obligations. And maybe even more importantly, it’s less likely that you would need a loan to finance the operational growth.
A company with an outcome less than 1 is considered risky by investors and creditors since it puts the spotlight on the fact that the company may not be able to pay its debts. A quota below 1 is called negative working capital.
What can you do to improve your working capital short term
Sell invoices through factoring
To sell invoices through factoring works so that you, as a business owner, sell your outstanding receivables to a factoring service supplier. The invoice, minus a fee, will be paid out to you immediately. This creates liquidity and the possibility to plan your own cash flow in a more efficient way, when e.g. salaries are due, or investments in new projects or equipment.
A loan means that you enter into an agreement with a lender. The lender will ask for payment for loaning you the money. You will pay an interest rate and, in certain cases, even a handling fee every time you pay off your installments. When you apply for a loan with the bank you often need to be able to present the company’s business plan and budget. That’s a requirement for the bank to determine the risk level a loan would mean for the bank.
Factoring and invoice handling through Invoier
Invoier offers solutions for factoring (e.g. invoice purchasing) so that you can focus on your company’s growth, without having to spend time on invoice administration.
Through the marketplace you will receive a transparent offer that says how much you can sell your invoice for - without any hidden fees, terms or special contract periods. You choose whether you want to sell one or several invoices, a level of flexibility most traditional factoring companies do not offer. Invoier’s services also open up financing possibilities for small and recently started companies, who are usually not offered factoring solutions or loans with low interest rates.
Want to know more about factoring or see exactly how much you would get paid for your invoice? Register your company at Invoier.com today. Creating an account only takes 2 minutes and is free and unconditional.
Company loan through Invoier
It can be a complex process comparing different options for company financing. That’s why we have made it simpler by doing it for you. We will help you to compare 18 carefully selected lenders. The offers will be exposed to a competitive comparison and we will guide you to the best offer and a fair price! You then choose whether to accept the proposal which is not in any way binding.
- Non-binding loans
- Loans that can be repaid at any time without extra charges
- From 5% interest rate and up to 60 months amortization time
- Want to know more? Contact us for a free financial counselling session!
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