Starting a business for the first time is exciting and scaring all at once. To help you assess properly your financial plan, we’ve written and compiled a checklist of key steps.
BEFORE STARTING YOUR BUSINESS
Before we get to the heart of the matter, let’s have a reminder of the main concepts.
WHAT IS A WORKING CAPITAL?
Your working capital is an important part to focus on before running your business. It is the money needed to function properly and cover the company’s cash flows shifts. It corresponds to an amount of money a company must have permanently in order to cover its cash gaps between expenses and receipts.
Working capital is the difference between your company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.
CAUSE OF HAVING WORKING CAPITAL NEEDS
The evolution of the cash flow requirement reveals the situation of your business. The cash requirement can be accentuated by multiple causes, such as:
- Insufficient working capital due to excessive investment
- Customer payment default resulting in a lack of cash
- Poor financing of the working capital requirement (increase of stock, late payment or extension of credit granted to customer)
- Cancellation of order resulting in an accidental selling of stock
- High charges (salaries, rents, etc.,)
HOW TO LIMIT YOUR NEEDS IN WORKING CAPITAL?
It is necessary to analyze the situation of your business from:
- The evolution of your turnover
- Payment delays from your customers and suppliers
- The organization and rotation of your stock
- Your debt and tax
If you are aware of an upcoming period when your business will hit a low cash flow period, you will be able to plan ahead to arrange your finances. By knowing when you will have a period of strong cash flow, you can plan to expand.
HOW TO RECOGNIZE A NEED IN WORKING CAPITAL?
Working capital needs can be spotted via the balance sheet structure.
Thus, it advisable to analyze, with a chartered accountant, whether the equity or long term debts of the company allow or not to finance the operations. Constant monitoring of inflows and outflows helps identify periods of cash flow requirement. The priority is to check over which period equity and long term receivable are sufficient to finance operation.
HOW TO FINANCE IT?
The bank can offer you solutions to strengthen your cash flow. To do so here are different financing tools to support your working capital requirements:
When the bank authorize an overdraft, it opens a line of credit with a set amount allowing the company to be overdrawn util the threshold has been reached.
Allows your company to have a certain amount of money loaned to it by a bank, for an interest rate to be paid in return.
Is an authorized short term overdraft (between 2 and 4 weeks). It is a cash loan offered by bank in order to more flexible manage its deferred gains and immediate expenses.
Letter of Credit:
It is a commitment issued by a bank on behalf of one of its customers to guarantee a payment that must be made to a third party as the result of an import/export transaction.
At BFL, our team of experts will then be able to work out with you how much money do you need to properly start your business and what is the best way to finance your growth over time.
- Having working capital needs means running out of money on pay off your debts on the scheduled date.
- Establish a forecast cash flow plan to detect your needs in advance.
- A precise analysis allows you to anticipate and limit your cash flow needs.
- The bank can offer solutions (overdraft, credit, mobilization of receivables, etc.,).