Understanding Operating Capital and Operating Capital Financing

To gauge business success, many owners look at their monthly or annual revenue. Total sales are important, but they’re not the only factor you should keep in mind. For a healthy, growing business, you also need to have plenty of operating capital.

At this point, you’re probably wondering, “Aren’t revenue and capital the same thing?” There’s an important difference between the two. Improving your working capital can have a positive effect on your revenue, customer satisfaction, supplier relationships, and tons of other things.

What Is the Difference Between Operating Capital and Revenue?

Your working capital, or operating funds, refers to liquid business assets. It’s the money you have available for running your business every day. Working capital includes the cash in your register and the available funds in your company’s bank account.

Revenue is similar but slightly different; it includes sales in the form of invoices. After you’ve sent and billed products, you’ve technically made sales, but you haven’t seen an increase in your working capital yet.

Why Does Working Capital Matter?

If your customers pay their bills in two or three weeks, this situation probably doesn’t pose much of a problem. In some industries, though, it’s common for clients to require anywhere from two to six months for payment, especially insurance companies.

The longer customers take to pay you, the harder it is to have a stable cash flow. You need funds to buy more inventory, handle payroll, cover taxes and take care of other operating expenses. If the capital you have on hand isn’t sufficient to pay your bills, then it doesn’t matter how many sales you’ve made. You can’t get at the cash while it’s locked in unpaid invoices, at least not without assistance.

How Can You Improve Operating Capital?

There are several ways to help your company’s available capital and cash flow. Some involve changing the way you handle billing and others require applying for outside financing. For example, you can try making changes to get clients to pay more quickly, perhaps offering a small discount for early payment.

Factoring is a type of financing that lets you get working capital by selling unpaid invoices. You can balance out your cash flow this way. Many manufacturers, wholesale businesses, and distributors use this method.

What Are the Benefits of Operating Capital Financing?

By increasing your working capital, you protect your ability to pay your bills. This can get you better terms for inventory and keep your credit score safe. With more available funds, it’s easier to reach business goals, too.