Starting your own business

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Managing Working Capital

 

Working Capital and Day to Day Financing

Working capital is the term which is given to the day to day financing of a business. Items which are typically including within the definition are the payments made to suppliers, utility providers and business overheads which a venture might ordinarily incur.

Financing Working Capital Requirements

The general rule for financing the working capital needs of a business is that short-term requirements should be sustained using short-term funding sources.

When starting a small business these sources can range from the owner’s personal money, bank overdrafts and credit given by the enterprise's suppliers. Longer term sources of funds, such as loans and debentures are not generally used for this purpose.

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Monitoring Working Capital

All businesses should ideally monitor the amounts of working capital currently be absorbed by it and use sufficient means to ensure that there is enough for forthcoming requirements.

The effect of mis-managing and running out of short-term finance might result in creditors filing petitions for the business to be wound up. The strength of the balance sheet, which might contain highly valued fixed assets would be irrelevant to a business unable to pay its immediate debts.

Having accurate and up-to-date accounting records together with a well thought-out and realistic rolling budget would aid a business in its monitoring and might help avoid situations where unplanned applications are made for immediate financing.

Should be additional funds be granted, they are likely carry a cost premium to the enterprise in the form of higher overdraft charges, arrangement fees or calls for them to be backed by high ratios of security.

 
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