What is working capital?

What is working capital?

When a company refers to working capital, this relates to the funds that are required to keep the business afloat during the operational cycle.

In other words: working capital is the money that tides the company over on a day-to-day basis. The operational cycle stretches from the day the company pays for the materials needed to manufacture or assemble its products, to the day it receives payment from its customers for these delivered products.

Some customers pay on credit sales terms, which means the company does not receive cash on delivery. Rather, the business must wait 30, 60, 90 or even 120 days from the date of invoice for payment. This is why positive working capital is so important. And given that the operational cycle can take months – having reliable access to funds can be the difference between business failure and business resilience.

What is working capital as a financial metric?

Businesses calculate their working capital to measure how well they are faring financially. Without going into too much detail, this metric is determined by taking an organisation’s current liabilities and subtracting these from the current assets.

Current assets include any type of assets that can be quickly converted to cash when funds are needed. Such assets include:

  • Funds in the bank
  • Accounts receivable (i.e. invoices)
  • Inventory
Any other resources that can be turned into cash swiftly

Current liabilities are typically those expenses that are due in less than 12 months. If you owe much more than you have owing to you, in the form you can quickly convert to cash, then your working capital has gone into negative territory. This means that you have no cash at hand and no funds flowing into your business to keep things up and running.

Is your working capital tied up in unpaid invoices?

If you have earned well on paper, but you’re still waiting for your customers to pay your invoices, you could be putting your business under financial strain. Can you really afford to wait out those lengthy credit sales terms?

What happens if something unexpected happens, such as a natural disaster or unprecedented dip in demand? How quickly will you run out of cash to pay the rent, meet your salary bill or keep the lights on?

Even if you do have (just) enough money to pay your operational costs, what happens if you suddenly receive a larger order from an existing customer, or an exciting new request from a new business partner? Is your mediocre cash flow holding you back from reaching your full business potential? Every company needs the agility to grow and respond to new market demands when these come along. Otherwise who knows if the opportunity will ever come knocking again?

One way to untether the money that is owing to you is invoice factoring.

What is working capital from a factoring firm?

Factoring companies specialise in buying your accounts receivable in return for much-needed working capital. This is a well-established type of debtor finance that typically works as follows:

  • Factoring firms give you the ability to draw cash back into the business before your customers’ invoices are due.
  • You receive around 75% of the value of an invoice and the balance is paid as soon as your customers settle the account in full.
  • The factoring company handles all debtor administration on behalf of your business.

If you choose to factor your invoices, how does your business benefit?

When you opt for factoring as your working capital solution, you are able to:

  • Unlock the cash that is tied up in your invoices.
  • Benefit from having an expert team conducting a range of services for you, including handling collections, sending monthly statements, handling receipting and reconciliations.
  • Save a significant amount of time that you would have spent on administrative tasks, allowing you to focus on core business activities.

Why partner with Merchant Factors?

What is working capital if you can’t get hold of the capital in time? If your funds are caught up in red tape, you can’t work with them at all. For business finance solutions that really work for your business, when you need them to – partner with Merchant Factors.

This specialist and wholly independent factoring company was founded in 1988 to offer businesses of all sizes an alternative to traditional bank loans and overdraft facilities. The firm offers both local and cross-border finance; and it is able to tailor its facilities to suit your unique business needs and operational cycle.

Since the company was first launched, Merchant Factors has helped over 2,000 organisations to grow and meet their financial goals.

Unleash your working capital today. For fast, flexible invoice financing – contact Merchant Factors today.

Finance beyond the Numbers.