8/3/2019 Start Up Small Business Working Capital

1/3

Start Up Small Business Working Capital

For new businesses or those about to launch, working capital has a slightly different meaning. It

refers to the amount of money you will be borrowing from the bank or a similar lender to keepyour fledgling operation going until such time as your revenue is able to cover those expenses.

Your start-up money will secure a facility, pay utilities, purchase inventory and equipment, andpay salaries during those first months when very little is coming in as revenue. Calculating theamount of working capital that you need to borrow during this interim period is a little tricky for

several reasons, and many companies fail because they borrow too much or too little at thislaunching point. In todays economy, it is still possible to borrow for a new business, but you

will really have to do your homework to be taken seriously without being taken advantage of.

Often, when investors are evaluating a company they look at the working capital ratio as anotherindicator of the potential for financial success of that business. This percentage is arrived at by

simply dividing the current assets by the current liabilities. If the answer is less than 1.0, thisindicates the company has a negative working capital with too few liquid assets to cover the

short term expenses. On the other hand, if the ratio is above a 2.0 this could indicate poormanagement of the capital. The company may have too much inventory sitting on its shelves or

too much revenue sitting in the bank and not being invested into the further growth of thebusiness. An ideal range for the working capital ratio would be 1.2 2.0. These figures indicate

that a company has enough cash to cover day-to-day expenses with more to be buildinginternally, which could be upgrading technology or expanding operations, both activities of a

progressive and healthy company.

Working capital needs

Different industries have different optimum working capital profiles, reflecting their methods of

doing business and what they are selling.

Businesses with a lot of cash sales and few credit sales should have minimal trade debtors.Supermarkets are good examples of such businesses;

Businesses that exist to trade in completed products will only have finished goods in stock.

Compare this with manufacturers who will also have to maintain stocks of raw materials andwork-in-progress.

Some finished goods, notably foodstuffs, have to be sold within a limited period because of

their perishable nature.

Larger companies may be able to use their bargaining strength as customers to obtain more

favourable, extended credit terms from suppliers. By contrast, smaller companies, particularlythose that have recently started trading (and do not have a track record of credit worthiness) may

be required to pay their suppliers immediately.

Some businesses will receive their monies at certain times of the year, although they may incurexpenses throughout the year at a fairly consistent level. This is often known as seasonality of

8/3/2019 Start Up Small Business Working Capital

2/3

cash flow. For example, travel agents have peak sales in the weeks immediately followingChristmas.

Working capital needs also fluctuate during the year

The amount of funds tied up in working capital would not typically be a constant figurethroughout the year.

Only in the most unusual of businesses would there be a constant need for working capital

funding. For most businesses there would be weekly fluctuations.

Many businesses operate in industries that have seasonal changes in demand. This means thatsales, stocks, debtors, etc. would be at higher levels at some predictable times of the year than at

others.

In principle, the working capital need can be separated into two parts:

A fixed part, and

A fluctuatingpart

The fixed part is probably defined in amount as the minimum working capital requirement for

the year. It is widely advocated that the firm should be funded in the way shown in the diagrambelow:

8/3/2019 Start Up Small Business Working Capital

3/3

The more permanent needs (fixed assets and the fixed element of working capital) should befinanced from fairly permanent sources (e.g. equity and loan stocks); the fluctuating element

should be financed from a short-term source (e.g. a bank overdraft), which can be drawn on andrepaid easily and at short notice.

Profile of Vijaya Bank

Vijaya Bank a medium sized bank with presence across India. It was founded on

October 23, 1931 A. B. Shetty and a few other farmers in Mangalore, Karnataka in India..

The objective was to promote banking habits, thrift and entrepreneurship among the farming

community of Dakshina Kannada district in Karnataka State. The bank became a scheduled

bank in 1958. Vijaya Bank steadily grew into a large All India bank, with nine smaller banks

merging with it during 1963-68. The bank was nationalised on April 15, 1980. The bank hasnetwork of 1250 branches, 49 Extension Counters and 643 ATMs. All branches are

functioning on the CBS platform, covering 100% of the Bank's business.