Aggressive Approach to Financing Working Capital
Working capital is a financial metric that measures a company's short-term financial health. Companies use this information to determine how much capital they have for immediate needs. The two most common items accountants include in this formula are current assets and current liabilities. The information comes from a company's balance sheet. Companies can take an aggressive approach for financing operations using this information.
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Basic Formula
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The basic working capital formula is current assets less current liabilities. The difference indicates how much capital a company has to pay for liabilities incurred from standard business operations. Other formulas exist to turn this figure into a ratio percentage. A common comparison compares working capital to sales to determine how much sales contribute to working capital.
Financing Approaches
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An aggressive finance approach allows a business to decrease the time necessary to earn cash, the asset with the highest liquidity. One method is to factor accounts receivable. Companies will sell open accounts receivable to a third party, receiving 80 to 90 percent cash for these assets. This eliminates the need to wait for customers to pay off money owed to the business. Another option is to obtain a credit line, increasing draws taken on a bank account to pay for daily operations.
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Considerations
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The use of budgets often helps a company determine its cash needs. Companies can estimate their cash receipts based on historical records. The expected cash receipts -- which add to a company's current assets -- then go against a company's expected cash payments. If a deficit exists, a company will need to adopt an aggressive approach to finance working capital to meet this expected cash shortage.
Disadvantages
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Aggressive approaches to financing working capital can have serious disadvantages for a business. Factoring receivables, for example, often releases the collection techniques and styles to another company. Customers may be unhappy with receiving numerous phone calls from an individual attempting to collect receivables. Using short-term credit lines increases risk. If operations suddenly become unprofitable, the credit line remains unpaid and incurring interest until its paid off.
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