There is no single management style to address the multitude of working capital cycles existing in the various business sectors and the underlying industries. Taking raw resources and turning them into consumer goods has different time frames depending on the item produced. In addition, the sales period varies from product to product. Compare the production and sales cycle for an automobile to that of ice cream.
Cash is the lifeblood of any business, especially a small business operation. Find out how to raise capital, understand cash flow, financing of fixed assets and regular operations via banking instruments. Finance covers the cash aspect of the small business operation.
The college textbook definition of working capital is current assets minus payables and accrued expenses. The term explains the dollar value of flexibility a business operation has to take advantage of immediate opportunities or endure sudden or long-term setbacks. Since it is a balance sheet based formula the value is a function of a moment in time.
Working capital management is a function of finance whereby management ensures adequate cash is available to meet operational needs over the typical working capital cycle. The underlying elements of working capital management include 1) understanding the different forms of current assets and current liabilities and their corresponding cash cycles; 2) recognizing the relationships of production and sales flow; and 3) planning the inflows and uses (outflows) of cash.
In poker, deuces are often called the wild card. You can use the card as a ‘Two’ or as any other card in the deck. In effect, you can convert the card to something else. Well, convertible debt uses the same principle in business. The holder of the convertible instrument has a choice, continue to collect interest as a debt instrument or convert the debt to equity.
The process of collecting a large pool of investors, each contributing or investing a small amount of dollars for a highly focused project is referred to as crowdfunding. The crowd is financing the project or goal. This is very similar to how large non-profits address significant events worldwide. A good example is the American Red Cross addressing disaster relief in the aftermath of a major natural tragedy.
A ‘Capital Account’ is a term used in partnership and in limited liability company business formats. It refers to the individual balances in the equity section of the balance sheet. The basic formula for value is beginning balance plus contributed capital plus earnings from the current accounting period less any withdrawals