{"id":12629,"date":"2022-08-24T09:50:09","date_gmt":"2022-08-24T09:50:09","guid":{"rendered":"https:\/\/www.kredx.com\/blog\/?p=12629"},"modified":"2023-10-26T04:36:42","modified_gmt":"2023-10-26T04:36:42","slug":"how-much-working-capital-is-needed-to-grow-your-small-business","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/how-much-working-capital-is-needed-to-grow-your-small-business\/","title":{"rendered":"How Much Working Capital is Needed to Grow Your Small Business?"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"12629\" class=\"elementor elementor-12629\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-0432d09 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"0432d09\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b907ccf\" data-id=\"b907ccf\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-b412001 elementor-widget elementor-widget-text-editor\" data-id=\"b412001\" data-element_type=\"widget\" data-settings=\"{&quot;ekit_we_effect_on&quot;:&quot;none&quot;}\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<h2><b>How Much Working Capital is Needed to Grow Your Small Business?\u00a0<\/b><\/h2><p><span style=\"font-weight: 400;\">Every business needs funds for its growth and expansion. <\/span><a href=\"https:\/\/www.kredx.com\/what-is-working-capital\/\" target=\"_blank\" rel=\"noopener\">Working capital<\/a><span style=\"font-weight: 400;\"> is a crucial financing tool that helps a business&#8217;s day-to-day operations. Experts have defined it as the difference between a particular business\u2019s current assets and current liabilities. This metric helps one determine a company\u2019s growth potential and competency.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Businesses, especially MSMEs, need to determine how much funds they need to maintain their operations even in unforeseen circumstances. This blog focuses on important details that an enterprise should consider while assessing and calculating its <\/span>working capital needs<span style=\"font-weight: 400;\">.\u00a0<\/span><\/p><h2><b>Factors to Consider while Assessing Working Capital Needs for a Small Business<\/b><\/h2><p><span style=\"font-weight: 400;\">The following are some of the essential factors to consider when deciding the <\/span>working capital requirements<span style=\"font-weight: 400;\"> of a particular business:<\/span><\/p><ul><li style=\"font-weight: 400;\" aria-level=\"1\"><h3><b>Business Model<\/b><\/h3><\/li><\/ul><p>Working capital requirements <span style=\"font-weight: 400;\">would depend on the business model. For instance, a business that relies on heavy inventories and requires a longer period for processing would invariably need more working capital. However, an entirely service-oriented business would need only enough capital for smooth operations.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Working capital needs of a business might also depend on seasons if the business deals with products that are related to seasonality. For example, businesses that sell air conditioners might need a higher inventory before summer. In such cases, these businesses should make arrangements for a higher working capital loan during the specific season when it makes the most sales.\u00a0\u00a0\u00a0<\/span><\/p><ul><li style=\"font-weight: 400;\" aria-level=\"1\"><h3><b>Growth Plans and Stage<\/b><\/h3><\/li><\/ul><p><span style=\"font-weight: 400;\">Businesses that have been newly established may require higher working capital for growth and development, unlike established companies that have a steady revenue stream. In such instances, business owners must examine their financing requirements after assessing their growth and expansion plans and working capital positions.\u00a0<\/span><\/p><ul><li style=\"font-weight: 400;\" aria-level=\"1\"><h3><b>Working Capital Cycle\/Business Cycle\u00a0<\/b><\/h3><\/li><\/ul><p><span style=\"font-weight: 400;\">One has to consider the time difference between the revenues and expenses. Businesses should note that time difference is directly proportional to working capital need, i.e. higher the difference in time, the higher would be the working capital need.\u00a0<\/span><\/p><h2><b>How Much Working Capital is Needed by a Business?\u00a0<\/b><\/h2><p><span style=\"font-weight: 400;\">A business owner needs to carefully forecast how much working capital his\/her business needs. To calculate the <\/span>working capital needs<span style=\"font-weight: 400;\">, one needs to consider the above-mentioned factors as well as other factors like its size, type of business activity and turnover rate.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">All businesses need sufficient working capital; otherwise, they would not be able to continue their operations. However, having too much working capital can be counterproductive as well. While it would allow the firm to pay its obligations, the funds would not generate the income required for its growth.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">One must ensure that a company has some reserve funds required for unexpected situations. Having quick access to additional working capital also allows a company to capitalise on growth opportunities.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">The following sections will describe how to calculate a business\u2019s working capital needs.<\/span><\/p><h2><b>How to Calculate Annual Turnover Rates of a Business?<\/b><\/h2><p><span style=\"font-weight: 400;\">Given below are the steps to calculate:<\/span><\/p><p><b>Step 1: <\/b><span style=\"font-weight: 400;\">Divide \u2018average accounts receivable\u2019 by \u2018annual sales\u2019 and multiply it by 365 to get the \u2018accounts receivable turnover days.\u2019\u00a0<\/span><\/p><p><b>Step 2: <\/b><span style=\"font-weight: 400;\">Next, divide the average inventory by \u2018annual COGS\u2019 (Cost of Goods Sold) and multiply it by 365 to get \u2018inventory turnover days.\u2019<\/span><\/p><p><b>Step 3: <\/b><span style=\"font-weight: 400;\">Divide \u2018average accounts payable\u2019 by annual purchases and multiply it with 365 to receive the \u2018accounts payable turnover days\u2019.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">After one completes calculating the turnover rates of a business, it\u2019s time to consider the expansion plans and calculate the <\/span>working capital needs<span style=\"font-weight: 400;\">. To do this calculation, one would need a projected income statement, including the cost of goods sold and projected sales.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">So, to calculate working capital needs, one would need the following data:\u00a0<\/span><\/p><ol><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Accounts Receivable Turnover Days<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Inventory Turnover Days<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Accounts Payable Turnover Days<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Projected Sales<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Projected Purchases\u00a0<\/span><\/li><\/ol><h2><b>How to Calculate Working Capital Needs?\u00a0<\/b><\/h2><p><span style=\"font-weight: 400;\">One needs to follow these steps to calculate the required working capital:\u00a0<\/span><\/p><h4><b>Step 1: Calculation of Projected Working Capital<\/b><\/h4><ol><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Divide \u2018projected sales\u2019 with 365 and multiply it with \u2018accounts receivable turnover days\u2019 to receive the \u2018projected accounts receivable.\u2019\u00a0<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Then, divide \u2018projected COG\u2019 (Cost of Goods) with 365 and multiply it with \u2018inventory turnover days\u2019 to receive the \u2018projected inventory.\u2019\u00a0<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">After this, divide \u2018projected purchases\u2019 with 365 and multiply it with \u2018accounts payable turnover days\u2019 to get the \u2018projected accounts payable.\u2019\u00a0<\/span><\/li><\/ol><h4><b>Step 2: Calculation of the Increase from Historical Working Capital\u00a0<\/b><\/h4><ol><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Subtract \u2018historical accounts receivable\u2019 from \u2018projected accounts receivable\u2019 to get the \u2018change in accounts receivable.\u2019\u00a0<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Deduct \u2018historical inventory\u2019 from \u2018projected inventory\u2019 to get \u2018change in inventory.\u2019<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Subtract \u2018historical accounts payable\u2019 from \u2018projected accounts payable\u2019 to get \u2018change in accounts payable.\u2019\u00a0<\/span><\/li><\/ol><h4><b>Step 3: Calculation of New Working Capital Needs<\/b><\/h4><p><span style=\"font-weight: 400;\">To receive \u2018working capital needs, one needs to add up \u2018change in accounts receivable\u2019 with \u2018change in inventory\u2019 and subtract \u2018accounts payable\u2019 from the amount. The formula is illustrated below:\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">(Change in accounts receivable + change in inventory \u2013 change in accounts payable)\u00a0<\/span><\/p><h2><b>Reasons Why a Small Business Might Need Additional Working Capital\u00a0\u00a0<\/b><\/h2><p><span style=\"font-weight: 400;\">The following are some reasons for a small company to need more working capital:<\/span><\/p><ul><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Businesses might face sudden cash crunches and fail to meet commitments to suppliers and employees. They might even fail to pay taxes because customers fail to make payments. This is when working capital might bail them out.\u00a0<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A business might need working capital for project-related expenses and for paying temporary employees.\u00a0<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Extra working capital will prove to be beneficial for availing supplier discounts while one places an order in bulk.\u00a0<\/span><\/li><li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Small businesses might face seasonal differences in cash flow. In such cases, extra working capital is the perfect solution to keep running the business.\u00a0<\/span><\/li><\/ul><p><span style=\"font-weight: 400;\">Fintech service providers like KredX offer working capital solutions in the form of <a href=\"https:\/\/www.kredx.com\/working-capital\/invoice-discounting\" target=\"_blank\" rel=\"noopener\">invoice discounting<\/a>. Its transparent policies, cutting-edge technology and hassle-free procedures enable businesses to solve their working capital needs smoothly.\u00a0<\/span><\/p><h2><b>Bottom Line\u00a0<\/b><\/h2><p><span style=\"font-weight: 400;\">To sum up, a business needs to assess and calculate its <\/span>working capital needs<span style=\"font-weight: 400;\"> to meet its potential. Small businesses face such problems accessing <\/span>working capital<span style=\"font-weight: 400;\"> due to their lack of assets for collateral and credit history. However, there are many working capital finance options like invoice discounting that can help in this regard. <\/span><\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>How Much Working Capital is Needed to Grow Your Small Business?\u00a0 Every business needs funds for its growth and expansion. Working capital is a crucial financing tool that helps a business&#8217;s day-to-day operations. Experts have defined it as the difference between a particular business\u2019s current assets and current liabilities. This metric helps one determine a [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":12630,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[65],"tags":[72,93,37,38],"class_list":["post-12629","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-invoice-discounting","tag-bill-discounting","tag-investment-options","tag-invoice-discounting","tag-working-capital"],"_links":{"self":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/12629","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/comments?post=12629"}],"version-history":[{"count":22,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/12629\/revisions"}],"predecessor-version":[{"id":15532,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/12629\/revisions\/15532"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media\/12630"}],"wp:attachment":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media?parent=12629"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/categories?post=12629"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/tags?post=12629"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}