Having the cash on hand to operate and be competitive is critical to your success as a small business. So it's critical to anticipate your need for working capital, which is the money used in your business as part of its normal operations. This consists of income minus costs, including inventory, payables and receivables, and insurance.
- Estimate the amount of working capital you need to have on hand.
- Consider the cost of labor, supplies, rent, utilities, storage and salaries; and the cost of professional services such as an accountant, lawyer, advertising and PR or marketing firm.
- Define the stages your business goes through.
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Break your business down into cyclesDetermine how many days' worth of products and/or raw materials are inventoried. Also look at how many days are needed for accounts payable to your suppliers and the amount of time it takes to make your product or service sale. You should also determine the time it takes to collect monies owed to you, as well as the time it takes to convert collections into cash.
Estimate costsRemember to consider any changes that may affect your business, such as the terms and consideration you have with your suppliers and customers, payment terms, overhead and credit terms with your customers. Consider slow periods and adjust your estimates for working capital accordingly.
Find a lenderLoans not only assist with a business startup, they can supply you with working capital when you need to get through slow times or grow your existing small business enterprise.
- Calculate the cost of capital components.
- The cost of debt capital is equal to the interest rate on the business' debt adjusted for tax deductible interest expenses and the cost of equity capital. Calculate the portion of debt and equity to determine the investment investors expect to earn on a minimum return.
- Weigh the cost of each kind of capital by the proportion each contributes to the capital structure.