Sufficient working capital is essential to any business. It is defined by the simple equation of current assets (including debtors) minus creditors, explains the website informi.
The answer indicates the overall financial health of the business in terms of its ability to meet its short-term debts and liabilities – which it must be able to do to continue trading.
Working capital is closely related to another critical indicator of business performance, namely cashflow. Cashflow is literally just that: the net amount of cash held by the business after the deduction of cash paid out from cash received from trading activities.
Although the amount of working capital that is required varies from one company to another, depending on its trading profile, there are likely to be times when working capital or cashflow are under sufficient pressure that additional external funding is necessary in the shape of business finance.
That business finance may come from a number of possible sources – including a business finance loan. The Institute of Chartered Accounts in England and Wales (ICAEW) and the British Business Bank have jointly authored a comprehensive guide to all these sources in their Business Finance Guide.
It may be worth reviewing some of the most commonly used sources for major or relatively modest boosts to your working capital:
- in its detailed report for 2018, the UK Business Angels Association (UKBAA) claimed a membership of some 15,000 business angels at work in the UK;
- these are wealthy individuals – you might have seen some of them on the popular TV show the Dragon’s Den – prepared to invest funds in a business in return for a share in its equity;
- since you offer a share in the equity of your business, of course, you may also expect the investor to claim a share in the decision-making too;
- a further way for a company to raise business finance in its own right is through equity release on any commercial property it owns;
- equity release – effectively remortgaging the property – is commonly used by home owners as a way of releasing capital in their home but may be an equally appropriate way for any business to make the most of its property assets.
Although angel investment or equity release may offer ways of raising the business finance necessary for major projects such as the acquisition of other enterprises or the expansion of your business, there are also times when it may be needed to resolve immediate or ongoing cashflow problems.
- factoring offers a way of making the most of another of your assets – invoices receivable from your customers;
- invoices receivable may be sold to a factor, who pays an upfront value (typically around 85% of their value) and the balance – after deduction of the factor’s commission – once the debts have been recovered;
- this is similar to factoring, but invoice discounting leaves you responsible for the actual collection of invoices receivable, whilst receiving an upfront credit on their value;
- trade insurance effectively maximises the value of invoices receivable – boosting your business finance available – by indemnifying you against those customers who fail to pay your invoices or who fall into bankruptcy or insolvency.
There exist a number of ways in which you might boost the working capital available to your business – ranging from a business loan to the major investment likely to be required for business expansion or the acquisition of other businesses to your need to improve cashflow.