1) In a nutshell
A business’s working capital is equivalent to the amount of cash it can deploy very rapidly, otherwise known as its operating liquidity. Working capital is required for any business to pay its trade creditors for its day-to-day trading operations.
Growing businesses often suffer from a lack of working capital due to long payment terms. Invoice finance, such as MarketInvoice, can be a solution to this problem.
2) Also known as…
Operating liquidity; Cash flow; Current ratio; Working capital finance
3) How it works
- Working capital is the difference between your business’s current assets (except cash) and its current liabilities. It is one of several key metrics that your Finance Director or Accountant should be able to help you understand on a regular basis.
- If current assets are less than current liabilities, your business is running a working capital deficit and will have trouble funding day-to-day expenditure such as paying staff, rent or creditors.
- Many strong businesses see good profitability but poor working capital, due to long invoice payment terms. This fact gives rise to the saying, ‘Turnover is vanity, profit is sanity, cash is reality’.
- Firms suffering from negative working capital can improve their cash flow using invoice finance products like MarketInvoice.
Where businesses are suffering from a negative working capital position, they can improve it using a line of credit from a finance provider. Common working capital finance solutions include overdrafts and invoice finance.
There was a time when a bank would help businesses through short term cash flow difficulties with a loan or overdraft extension, but since the credit crunch of 2008 it has become much tougher to access bank finance. For businesses looking for working capital support, MarketInvoice can provide a flexible line of credit through its online invoice finance product.
- Total current assets
- Any cash or assets that can quickly be turned into cash, including accounts receivable and inventory.
- Total current liabilities
- All liabilities due in the near term, including wages, taxes and accounts payable.
- Current ratio
- A metric that describes your business’s current working capital position, calculated by dividing current assets by current liabilities.
6) Next steps
Also see… working capital finance; invoice trading; invoice discounting.