Find out more about small business working capital loan
Working capital is the indicator that is present in the daily life of the entrepreneur, whether he or not. This small business working capital loan is used to buy new machines,maintain inventories, to pay suppliers (purchases of raw materials or resale goods), as well as to pay taxes, wages, and other operating costs and expenses.
When it comes to loan management, you can achieve great results and leverage good opportunities within the business.
To start this whole conversation, we need to be aligned with the concepts covered, agree?
Therefore, it must be understood that working capital (CG) measures the amount needed to keep the operation running for a certain period.
And among all cash inflows and outflows, we can calculate it as follows:
CP = Current Assets – Current Liabilities
In this, the assets are rights such as inventory value, cash, and accounts receivable.
Finally, liabilities are obligations to pay such as bills, wages, charges, taxes, bank interest.
To take a quick look: If our obligations or cash outflows exceed entitlements (cash inflows), we will have negative working capital – reducing cash.
This situation is more common than one might imagine and the vast majority of shopkeepers do not know the real balance of this account when selling without having the vision of the working capital needed.
Indicator introduced, we move to loans!
A bit of Business Loan Management
Quickly, loans are a form of credit in which capital can be used for any purpose without specifying the purpose.
Being able to use this money to pay some bills and at the same time invest in the business.
This modality is simpler and less bureaucratic than financing, for example.
However, care must be taken when managing a loan anyway. So, I’ve listed a few things to keep in mind:
- I am absolutely sure of the purpose of this capital.
- Beware of the interest and costs involved! – Delaying payments or even not making them can become a snowball.
- Add payments to your fixed costs – I’ll talk about this later;
- Term – Interest may increase as no payment is made;
- Cost-benefit – Compare the viability of capital with the objective. Is there enough profit generation that could replace this capital? – No no, it might be interesting to wait;
One big paradigm we find in the market is that loans are bad and should be used to pay off debt – and that’s not true.
With the proper management of this capital, it is possible to invest in improvements and expand.
Take the following situation as an example:
A shopkeeper named Alberto has e-commerce that invoices an average of $ 50,000, with a gross margin of 36% and fixed costs and expenses of $ 10,000.
Therefore, your net profit generation is as follows:
Gross Profit = Billing * Contribution Margin
Gross Profit = 50,000 * 0.36 = 18,000.00
Net Income = Gross Income – Month Bonds
Net Income = 18,000 – 10,000
Net Income = 8,000.00
Now let’s say that Alberto met Biz Capital and sought in them the opportunity to leverage his financial gains.
He borrowed $ 10,000 to invest in marketing and, as a result, was able to triple his revenue.
If this entrepreneur makes no change in his pricing and margin, we will get the following result:
Gross Profit = Billing * Margin
Gross Profit = 150,000 * 0.36 = 54,000.00
And even if their fixed costs triple, there will still be enough net profit to generate cash and repay the loan – maybe even a single installment.
By properly managing capital, great results can be achieved.
Now, it is worthless to increase the company’s net profit, if there is no cash generation, do you agree?
Remember the working capital formula, you need to increase the inflows and decrease the outflows.
So pay close attention to the next topic of the article, where I will talk about the relationship between working capital and loans.
Relationship: Loans and Working Capital
As you can see from the previous example, loans can help in a number of ways – from expansion to paying bills and debts.
And as we always strive to grow, it is vital to pay attention to the biggest cycle of corporate mistakes in management: Not controlling working capital → Accumulating debt → Loans → More debt…
It is common for Price Right to find numerous cases like this in retail.
The key to preventing the onset of business decline is to measure and optimize working capital, and by doing so, use third party capital to grow the business based on these three key metrics: customer receipt, supplier payments, and business turnover. stock.
By working through these three strands in your business, your working capital needs are reduced and thus your financial gains will become cash generators.