Cash flow is an important component of every enterprise, as it meters the movement of money into and out of a firm. It measures the inflow and outflow of cash and is a key indicator of a company’s financial health.
A proper cash flow helps make financial decisions, avoid financial problems, fund growth and expansion, improve financial stability, and much more.
Cash flow is essential in ensuring a business’s success and sustainability. Monitoring and managing cash flow should be a key part of any business’s financial strategy.
What is Working Capital?
Working capital is a financial indicator that assesses a company’s capacity to fulfill its immediate obligations. A positive working capital balance indicates that a company has enough current assets to cover its short-term obligations.
In contrast, a negative working capital balance suggests that the company may have trouble meeting its short-term obligations.
The global working capital financing market is expected to reach $3 trillion by 2024.
Cash flow is crucial to a business’s stability and financial health. A company with a strong working capital position can typically meet its short-term obligations and has the resources it needs to invest in growth and expansion.
How to Calculate Working Capital?
The formula for calculating working capital:
Working Capital = Current Assets – Current Liabilities
Assets having a one-year predicted cash flow are known as current assets. Examples include cash, accounts receivable, and inventory investments made immediately.
Obligations or commitments that are payable within a year are referred to as current liabilities. Examples include Accounts payable, short-term borrowing, payable salaries, and tax obligations.
So, to calculate working capital, you simply subtract current liabilities from current assets.
It’s crucial to keep in mind that working capital might change over time and can not give a true representation of a company’s financial status. It’s simply one of several indicators that should be combined with other financial information to have a deeper insight into a firm’s financial position.
What are the Benefits of Working Capital?
There are several benefits to understanding what your working capital is, including:
Improved cash flow management
Understanding your working capital helps you identify areas where you can improve your cash flow and better manage your cash resources.
Better decision-making
By understanding your working capital, you can make more informed decisions about when to invest in growth, when to pay bills, and when to take on additional debt.
Improved creditworthiness
A positive working capital balance indicates to lenders and investors that you are financially stable and able to meet your short-term obligations, which can improve your creditworthiness and increase your chances of securing financing.
Increased financial stability
A strong working capital position provides a safety net for your business, helping to ensure that you have the resources you need for unexpected expenses and economic downturns.
Better ability to plan for the future
Understanding your working capital helps you to plan for the future, anticipate potential cash flow constraints, and make decisions that will help you to grow your business over the long term.
Working capital is important for businesses of all sizes. It provides valuable insights into your financial health and helps you make better decisions about managing your finances and growing your business.
What is the Runway, and How is it Related to Working Capital?
Runway and working capital are related in that they both help to measure a company’s financial stability and ability to continue operating.
Runway refers to a company’s time before it runs out of cash and needs to either raise more capital or shut down its operations. It is typically calculated as the number of months a company can continue operating with its current cash balance, assuming no additional revenue is generated.
In contrast, working capital assesses a company’s capacity to control its cash flow and satisfy short-term obligations. It is determined by subtracting a company’s current liabilities from its current assets.
A positive working capital balance and a long runway both indicate that a company has a strong financial position and is likely to be able to continue operating for an extended period without needing to raise additional capital.
However, while working capital is focused on short-term stability, runway looks at the longer-term ability to continue operating. Both metrics are important to consider when evaluating a company’s financial health. Together, they provide a comprehensive picture of the company’s ability to manage its finances and maintain its operations.
Now we discuss the companies that provide working capital.
Capchase
Capchase is a financial technology company that provides alternative funding options to SaaS businesses. The company specializes in invoice financing, allowing businesses to access cash tied up in outstanding invoices.
With Capchase, businesses can sell their invoices to investors, who provide the funds needed to cover their expenses and maintain their operations.
It provides businesses with an alternative funding source that can help bridge the gap between invoice generation and payment, allowing them to avoid cash flow constraints and maintain growth.
Capchase’s platform is designed to be user-friendly and accessible to businesses of all sizes. The company’s process is streamlined and efficient, allowing businesses to quickly and easily access the funding they need.
OnDeck
OnDeck is a technology-driven financial services company that provides small and medium-sized businesses with access to capital. The company offers short-term loans and lines of credit to help businesses manage their cash flow and meet their working capital needs.
OnDeck’s platform uses innovative technology, including machine learning and big data analysis, to make lending decisions quickly and efficiently. It allows the company to offer business funding in days rather than weeks or months.
In addition to its lending services, OnDeck provides its customers with valuable insights and information about their business performance, including data on sales, cash flow, and other key financial metrics. It helps businesses to better understand and manage their financial health.
Fundbox
Fundbox is a fintech company that provides working capital solutions for small businesses. The company offers various financial products and services. It includes lines of credit and invoice financing to help businesses manage their cash flow and grow their operations.
Fundbox uses a proprietary technology platform to analyze data and make lending decisions, providing quick and easy access to working capital for small business owners.
The company also offers tools to help businesses manage their finances, including a dashboard that provides real-time insights into their cash flow and debt repayment.
The main goal of Fundbox is to help small businesses access the working capital they need to grow and succeed. The company aims to provide a simple and convenient solution for businesses struggling to secure funding from traditional banks and financial institutions.
Biz2credit
Biz2Credit is a financial technology company that provides small business owners access to a range of financial products and services, including working capital loans.
The working capital feature of Biz2Credit allows small business owners to apply for a loan to help manage their short-term cash flow needs.
Through the working capital feature on Biz2Credit, small business owners can apply for loans ranging from $5,000 to $5 million, with repayment terms typically ranging from six months to two years. The loan application process is quick and easy, with most loan decisions made within 24 hours of receiving a complete application.
One of the key benefits of using the working capital feature of Biz2Credit is that it allows small business owners to access fast and flexible funding to manage their cash flow needs. Whether you need to cover unexpected expenses, invest in growth, or meet payroll, a working capital loan from Biz2Credit can help ensure your business has the resources it needs to succeed.
LendingTree
LendingTree is a leading online loan marketplace that connects consumers with multiple lenders. The platform provides a simple and convenient way for borrowers to compare loan options and find the best deal on loans for various needs, including personal loans, home loans, auto loans, and more.
LendingTree operates as a comparison site, allowing borrowers to easily compare loan options from a network of lenders, including banks, credit unions, and online lenders. By entering information about their loan needs, borrowers can receive multiple loan offers from different lenders, which they can compare and choose from.
The platform provides access to a wide range of loan products, from unsecured personal loans to secured home loans and everything in between.
Pipe
The Pipe is a financial technology company that provides businesses with a better way to manage their cash flow and access working capital. The platform offers a suite of tools and services designed to help businesses optimize their cash flow and get the financing they need to grow.
One of the key features of Pipe is its cash flow management tool, which gives businesses real-time visibility into their cash position and helps them better manage their finances. The tool integrates with a business’s existing financial systems and provides insights into its cash flow, enabling the business to make informed decisions about managing its finances.
In addition to its cash flow management tool, Pipe also provides businesses with access to working capital financing. The platform offers flexible financing options, including revolving lines of credit, to help businesses cover their short-term cash flow needs.
Founderpath
Founderpath is a financial technology company that helps bootstrapped SaaS startups with working capital. The company offers various services like customer metrics, business metrics, valuation calculators, and many more.
With Founderpath, startups can also integrate various SaaS tools that play a very important role in the working process.
One of the key features of Founderpath is that they give a time limit of more than 12 months to pay back with a discount rate as low as 8%nIt becomes very helpful for the founders to use the capital as and when necessary without the hassle of returning.
There are no middlemen in the process of money transfer. You simply have to log in and do some necessary information filling which will give you a Founderpath score. The higher the score, the more capital is. After getting the score, money will be transferred to you within 24 hours. You don’t have to pay fees, and no lawyers are indulged in this process.
Uncapped
Uncapped is a financial services company that provides online loan services. The company deals with revenue-based financing, SaaS runaway loans, amazon seller funding, and fixed-term loans.
They have a user-friendly interface that allows you to apply in minutes, and the decision is given in under 24 hours. You just have to pay a flat fee; the full cost will be displayed on your screen upfront. It makes the process hassle-free.
One of the main features of Uncapped is the loan they provide ranges from $100k to $10Mn with no interest and no equity. It helps online businesses accelerate their growth without stressing the working capital. This company helps businesses with an online model and has been in business for more than six months with monthly revenue of $100k or more.
Clearco
Clearco is a financial technology company that provides digital banking services. The company offers various financial products and services, including debit cards, checking accounts, and money transfers.
One of the main features of Clearco is that they provide fixed payments, i.e., the payments are without compound interest, and weekly payments don’t increase with the repayment process.
Clearco aims to make banking more accessible and convenient for consumers by offering a modern, user-friendly platform that can be accessed from a smartphone or computer.
The company also provides tools to help users manage their finances and make informed financial decisions. Clearco’s mission is to provide its customers with a simple, transparent, and affordable alternative to traditional banking.
Conclusion
It’s important to remember that the concept of working capital is subject to interpretation and can be viewed differently by various individuals, businesses, and financial experts.
Working capital measures a company’s short-term financial health and can be evaluated from both quantitative and qualitative perspectives. While some may see a high level of working capital as a positive sign of a company’s stability, others may view it as an indication of inefficiency in managing resources.
In my opinion, a balance between having enough working capital to cover short-term obligations and maximizing the deployment of funds toward growth opportunities is the ideal situation.
However, the appropriate level of working capital varies between industries and depends on various factors, including the company’s size, operating cycle, and the stability of its revenue streams.
You may also explore some best financial management software for SMB.
