subject: Short Lived Working Capital And Short Term Business Capital [print this page] Short lived working capital, also referred to as short-term working capital, is the money a business needs to operate on a daily basis. Businesses obtain this capital mostly through sales to customers. These funds are used to pay rent, utilities, loans, and payroll. They are also used to purchase additional inventory, assets, and supplies. Effective management of short-term working capital enables a business to make a better profit in the long run.
Sometimes businesses find themselves lacking sufficient short lived working capital. Business owners usually do not want to take out another loan, so they turn to factoring. Factoring allows a business in need of capital to sell its accounts receivables at a discount to another company, called a factor. The factor then accepts the businesss account payments from customers until the funds are repaid. Businesses prefer factoring because it is not considered a loan; therefore, no debt is incurred on the balance sheet. Factors require businesses to process credit card purchases and to have doing so for a specified length of time. The funds may be used for any business activity.
Businesses can also improve their short lived working capital without have to factor or use other funding resources. To attract new customers, they invest in media advertising to reach a larger database of potential customers. In dealing with existing customers, businesses sometimes give discounts to clients who pay their accounts early (usually within ten days). They may also charge late fees to customers who take longer than the given amount of time (usually thirty days) to repay their accounts.
Short-term business capital, also known as short-term working capital, is the funds needed for a business to operate on a day-to-day basis. The amount of working capital a business has indicates its ability to generate sales and to pay liabilities when they are due. Liabilities include rent, payroll, utilities, and loan payments and inventory, assets, and supplies purchases. Effective management of working capital is necessary to produce long-term goals.
Businesses can increase their short-term business capital by changing how they deal with customers. For clients who fail to pay their accounts within the given amount of time, a business can charge late fees. To encourage customers to pay their accounts early, and thereby increasing its working capital, a business can apply small discounts for accounts paid off within a certain amount of time, usually ten days.
Another way to improve short-term business capital is to advertise through various media, including television, radio, newspapers, and billboards. These methods may cost the business some existing working capital, but the potential of reaching thousands of new customers outweighs the price paid to advertise.
Businesses can also implement different financial management strategies in order to increase short-term business capital. A general rule is to only pay bills when they are due. If there is no incentive to paying early, then hold that money until it is necessary to pay. Businesses can also invest in accounting software to easily input, edit, and manage financial information, including trends in working capital.
by: Sadie Hurst
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