According to the Small Business Administration, an agency of the United States Government, small businesses as defined represent 50 percent of non-farm GDP and 70 percent of net new job growth. Nine out of ten businesses are defined as small.
The Small Business Administration uses a guideline that defines small business as those with under 25 million dollars in revenues and under 500 employees. There is no hard and fast rule to define this powerful engine of the United States economy, but it is vitally important to cure the ills of small business in order to improve the jobs outlook and generate cash flow to reduce the United States budget and trade deficit.
According to the Small Business Administration ,Small Businesses need 3 things right now to reverse their fortunes:
1. Better access to capital in order to grow, as well as refinance existing debt.
2. Reduction of uncertainty of future expenses due to Obamacare
3. Evidence that Federal and State Governments will begin to reduce deficit spending, primarily United States Budget and Trade deficits.
What Are Your Working Capital Needs?
Working capital is one of the most difficult financial concepts for the small-business owner to understand. In fact, the term means a lot of different things to a lot of different people. By definition, working capital is the amount by which current assets exceed current liabilities. However, if you simply run this calculation each period to try to analyze working capital, you won’t accomplish much in figuring out what your working capital needs are and how to meet them.
A more useful tool for determining your working capital needs is the operating cycle. The operating cycle analyzes the accounts receivable, inventory and accounts payable cycles in terms of days. In other words, accounts receivable are analyzed by the average number of days it takes to collect an account. Inventory is analyzed by the average number of days it takes to turn over the sale of a product (from the point it comes in your door to the point it is converted to cash or an account receivable). Accounts payable are analyzed by the average number of days it takes to pay a supplier invoice.
Most businesses cannot finance the operating cycle (accounts receivable days + inventory days) with accounts payable financing alone. Consequently, working capital financing is needed. This shortfall is typically covered by the net profits generated internally or by externally borrowed funds or by a combination of the two.
Most businesses need short-term working capital at some point in their operations. For instance, retailers must find working capital to fund seasonal inventory buildup between September and November for Christmas sales. But even a business that is not seasonal occasionally experiences peak months when orders are unusually high. This creates a need for working capital to fund the resulting inventory and accounts receivable buildup.
Some small businesses have enough cash reserves to fund seasonal working capital needs. However, this is very rare for a new business. If your new venture experiences a need for short-term working capital during its first few years of operation, you will have several potential sources of funding. The important thing is to plan ahead. If you get caught off guard, you might miss out on the one big order that could put your business over the hump.
Types of capital needed by a business and their purposes?
For the sake of simplicity, capital is the amount of financial resources needed to implement and execute a business plan.
Before a business sells its first product or service, it needs financial resources for product development, sales, marketing, administrative support, the company’s formation, and countless other critical business functions.
Capital should not be perceived as just the amount of “cash on hand” but rather the amount of financial resources available to support the execution of a business plan.
While financial resources come in countless forms, types, and structures, two basic types of financial resources are available to most businesses: debt and equity. Debt represents a liability or obligation of a business. Debt is generally governed by mutually agreed upon terms and conditions as provided by the party extending credit. For example, a bank lends $2 million to a company to purchase additional production equipment to support expansion. The bank establishes the terms and conditions of the debt agreement, including the interest rate, repayment term, collateral required, and other elements. These terms and conditions must be adhered to by the company, or it runs the risk of default.
Equity represents an investment in the business, usually doesn’t have set repayment terms, but the owners of the equity investments do have a right to future earnings — they may be paid dividends or distributions if profits and cash flows are available. For example, a software technology company requires $2 million in capital to develop and launch a new software solution. A venture capitalist group invests the required capital under the terms and conditions present in the equity offering, including what their percentage ownership in the company will be, rights to future earnings, representation on the board of directors, conversion rights, and so on. The company isn’t required to remit any payments to the capital source per a set repayment agreement but has given up a partial right to ownership (which can be even more costly).
Of course, many variations, alternatives, subtypes, and classifications are present for each type of capital. If it were as easy as debt versus equity, there wouldn’t be much need for bankers, accountants, venture capitalists, and the like (which would be a welcomed change to most business owners).
You may be wondering whether debt or equity capital is best suited for your company. This decision really depends on the company’s stage in terms of its operating history, industry profile, profitability levels, asset structure, future growth prospects, and general capital requirements, as well as where the sources of capital lie.
The five most common sources of short-term working capital financing:
- Equity. If your business is in its first year of operation and has not yet become profitable, then you might have to rely on equity funds for short-term working capital needs. These funds might be injected from your own personal resources or from a family member, a friend or a third-party investor.
- Trade creditors. If you have a particularly good relationship established with your trade creditors, you might be able to solicit their help in providing short-term working capital. If you have paid on time in the past, a trade creditor may be willing to extend terms to enable you to meet a big order. For instance, if you receive a big order that you can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from your supplier if 30-day terms are normally given. The trade creditor will want proof of the order and may want to file a lien on it as security, but if it enables you to proceed, that should not be a problem.
- Factoring. Factoring is another resource for short-term working capital financing. Once you have filled an order, a factoring company buys your account receivable and then handles the collection. This type of financing is more expensive than conventional bank financing but is often used by new businesses.
- Line of credit. Lines of credit are not often given by banks to new businesses. However, if your new business is well-capitalized by equity and you have good collateral, your business might qualify for one. A line of credit allows you to borrow funds for short-term needs when they arise. The funds are repaid once you collect the accounts receivable that resulted from the short-term sales peak. Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for short-term needs only.
- Short-term loan. While your new business may not qualify for a line of credit from a bank, you might have success in obtaining a one-time short-term loan (less than a year) to finance your temporary working capital needs. If you have established a good banking relationship with a banker, he or she might be willing to provide a short-term note for one order or for a seasonal inventory and/or accounts receivable buildup.
In addition to analyzing the average number of days it takes to make a product (inventory days) and collect on an account (accounts receivable days) vs. the number of days financed by accounts payable, the operating cycle analysis provides one other important analysis.
You can see that working capital has a direct impact on cash flow in a business. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to making any venture successful.
Are you looking for more capital?
May I respectfully ask you, “Is capital the one thing your business or a business owner you know needs now?”
As an expert with over 20 years of business coaching experience, and teacher at three California Universities, and business owner, I agree that no matter how varied their enterprises and how different their businesses, there is one thing that is true for any business and for all businesses:
They need capital.
Capital funds the dream. Capital starts start-ups and generates growth. Capital is the oxygen that entrepreneurs need to breathe life into their venture so that they can create new jobs, produce products, and make that difference.
And that is why I was am happy to let small businesses of every kind know that we give every qualified entrepreneur and small business owner exactly that – access to capital from $5,000 to $50 million. Yes, capital in the amount of $5,000 to $50 million. With our mastery coaching you’ll qualify. See: http://www.prosperitybreakthroughs4u.com/every-business-owner-needs-know-dealing-bank/
We seek to give small business owners and entrepreneurs not only the know-how of how to get the money they need, but the know-who: meeting the exact people who can help them, as well as access capital. In fact we have created a program that helps to pay off the loan itself. See: http://www.prosperitybreakthroughs4u.com/loans-that-repay-themselves-program/
There are a few things that would be valuable for any small business seeking capital to consider:
1. Know that lenders want to lend to you: Lenders are in the business of lending money, and they really like to lend money to small businesses. The problem is that with traditional bank lending only 20-30% of small businesses actually ever get funding. That means over 70% of small businesses never qualify for traditional bank financing. It is your job therefore to make your business so attractive and financially sound that a lender cannot say no to you. With our business and loan mastery coaching you’ll meet this criteria. See:http://www.prosperitybreakthroughs4u.com/every-business-owner-needs-know-dealing-bank/
2. Do your work: Given the above, it follows that there are things you can do to ensure that you’ll get a loan: Show a consistent profit; Have a good credit history (both personally and business-wise); Have a solid business and marketing plan; Have unencumbered collateral ready if needed. With our business and loan mastery coaching you’ll meet this criteria. See:http://www.prosperitybreakthroughs4u.com/business-seen-doctor-lately/
3. Know your options: Today, there are a myriad of ways to get your business funded that go far beyond the traditional bank loan. It would behoove you to learn what they are and add some to your funding arsenal. That’s how you get fully funded, and that is what we aim to teach you. See: http://www.prosperitybreakthroughs4u.com/getting-ready-financing/
We are offering Free Loan Mastery Coaching Sessions for businesses who are in need of capital. See: http://www.prosperitybreakthroughs4u.com/free-life-mastery-coaching/
We will be offering these programs all year, so contact us immediately if you are in need of immediate capital. It should certainly be worth your time because, after all, our goal is to help you fund your dream too.
If you are in need of business coaching call us at 415-678-9965 and reviewwww.prosperitybreakthroughs4u.com
The Business Doctor