How to increase your company’s working capital

By February 12, 2018Cash Flow, Factoring
increase your company’s working capital

How to increase your company’s working capital

The working capital of your company is the capital that your business uses to pay for the daily trading operations. It reflects a company’s liquidity, efficiency, and overall health. Its most important components are money in cash, investments and accounts receivable with easy liquidity in the short term which allow to cover operating costs such as rent or mortgage payments, public services, suppliers and, above all, its employees.

If your business is growing, it is possible that your need for working capital will also consequently increase. In industrial businesses, which have longer production cycles, the need for working capital is greater because it requires the transformation of raw materials into the final product that is going to be sold, while waiting for client payments and delaying the recovery of your investment. Its cash cycle is much slower than that of companies in other economic sectors. In other businesses, such as the aircraft turbine repair business, the working capital cycles are much longer. The cycle begins when your business receives a purchase order to repair a turbine. From this moment, the unit is dismantled, the parts to be replaced are assessed and ordered, and finally installed and tested. Once the turbine is again fully functional, you can bill for your work. Depending on the payment terms established by your client takes, your cycle could go up to 45 or 60 days.

In commercial companies, the cash cycle is shorter because you do not have to invest in raw materials or production resources, you simply buy and sell the same product with a margin of intermediation. In this case, your calculation can be summarized depending on the payment terms that your provider offers you, and which your business offer its clients. If you must pay for the product within 15 days and give your buyer 45 days, the deficit to cover in your cash cycle is 30 days, a term that must be supported with your resources.

For trucking or truck logistics companies, the cash cycle is between 40 and 60 days, if you count as day one the moment you pick up a load and refuel your truck until your broker pays for the load. Within the United States, a truck traveling between Los Angeles and New York can take approximately 5 days (driving 10 hours a day) to complete its journey; If this is the case, and your broker takes 30 more days to pay, the cash cycle for this load specifically, is 35 days. This means that your investment in fuel and truck usage has a return of 35 days.

There are different financial tools that can increase the working capital for your company, among which are the short term bank credit lines, the investment of liquid capital by the owner or a partner, the sale of shares of your company in public markets or bond issuance. In this same sense, there is another option to obtain capital without creating debt for the organization: invoice factoring. It is increasingly being used in the market by fast-growing businesses that cannot wait for long credit studies for a bank to provide financing. Unlike the traditional methods of financing described above, factoring or invoice discounting, is based on giving immediate liquidity to your business based on your accounts receivable. If your business allows for sales on credit and your customers require this credit to continue to buy your product, the most dynamic solution to increase your working capital is to use factoring. It guarantees that your business can progressively acquire working capital at the same rate as your sales grow.

There are other modern tools that can help your company to increase working capital, such as supplier financing. This tool is used when your company has a bank line of credit but has reached the line´s maximum credit limit. In this situation, your company can go to a factoring or financing company to find an alternative to increase your cash flow or working capital. In supplier financing or supply chain financing, typically, your company can have the factoring company pay your suppliers directly. In turn, you will acquire a liability towards the factoring company to pay back the funds that were originally due to your supplier. Usually, the factoring company will grant your company an additional period to pay back the payments done on behalf of your company.

In conclusion, although there are several financial tools to increase your working capital, factoring is the only one that allows for immediate liquidity, helping small and medium-sized companies obtain short term leverage. Additionally, by ensuring healthy indicators on their financial statements, it will not imply debt incursion and, on the other hand, the contracting company can also be relieved of all the administrative burden that involves the collection of invoices or payments to suppliers, since this service is included in non-recourse factoring, and focus only on finding new customers, improving their service or increasing their production level.

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