How can you anticipate working capital changes more effectively?
Effective working capital management ensures that you have enough working capital to meet your short-term payment obligations at all times. Ideally, it even provides you with a financial buffer that allows you to seamlessly bridge the gap between your expenditure and income. But how much working capital is ‘enough’ and what happens if you don’t have enough of it?
Work out how much working capital you need
To check whether your company can meet all its short-term financial obligations, you can use the following formula to calculate your net working capital:
The difference is the amount you have left to ‘operate’ your business.
| Assets | Liabilities | ||
| Fixed assets | 1,500 | Equity | 3,000 |
| Inventories + orders on hand | 100 | Long-term debts (> 1 year) | 2,100 |
| Trade receivables (outstanding customer invoices) | 250 | Suppliers | 700 |
| Liquid assets (bank account balance) | 200 | Short-term debts (< 1 year) | 800 |
| Total assets | 2,050 | Total liabilities | 6,600 |
| Total current assets (inventories + trade receivables + liquid assets) |
550 | Total current liabilities (suppliers + short-term debts) |
1,500 |
Net working capital = 550 - 1.500 = -950
In this example, the working capital requirement amounts to 950 euros. The business owner is unable to meet their short-term payment obligations unless they can make up the cash shortage.
| Assets | Liabilities | ||
| Fixed assets | 2,500 | Equity | 1,000 |
| Inventories + orders on hand | 100 | Long-term debts (> 1 year) | 1,100 |
| Trade receivables (outstanding customer invoices) | 350 | Suppliers | 100 |
| Liquid assets (bank account balance) | 500 | Short-term debts (< 1 year) | 400 |
| Total assets | 3,450 | Total liabilities | 3,100 |
| Total current assets (inventories + trade receivables + liquid assets) |
950 | Total current liabilities (suppliers + short-term debts) |
500 |
Net working capital = 950 - 500 = 450
In this example, sufficient liquid assets are available to meet short-term financial obligations. The business owner has a low working capital requirement.
Finance your working capital
Perhaps you have high or changing working capital requirements or you sometimes need to incur expenses before you have the necessary funds in your account. To keep your business running smoothly, you can finance your working capital with a business credit facility. Working capital financing is a convenient solution for:
- Easily covering your bills and current expenses, such as your employees’ wages and your suppliers’ invoices
- Regular unexpected expenses
- Major expenses expected in the near future
Two ways to finance your working capital
Depending on your financial planning and working capital requirements, there are two ways to finance your working capital:
Advance in current account
An advance in current account allows you to overdraw your business account. This option is recommended if you:
- Want to quickly cover unexpected liquidity shortages
- Want a flexible overdraft facility
- Need working capital financing of 6,000 euros or more
Straight loan
If you know precisely how much working capital you need and for how long, a straight loan is a suitable option:
- Draw down one or more fixed amounts for a specific period
- For working capital needs starting from 25,000 euros
- Can be combined with an advance in current account
What does working capital financing cost?
For an advance in current account or a straight loan, you pay a one-off loan origination fee (250 euros), a credit line fee (0.25%) every three months and a management fee (23.16 euros) every three months. Depending on the credit facility you choose, interest and additional fees may apply:
For an advance in current account, you only pay interest on the amount you’re overdrawn by each day. Interest is based on the base rate of interest for business credit (which has been 10.25% per annum since 1 January), plus 2.00%. The base rate is reviewed every six months.
For example, if you overdraw your account by 1,500 euros for 20 days, it will cost you around 10.21 euros ((1,500 euros x 12.25% interest x 20 days) / 360 = 10.21 euros for 20 days).
For a straight loan, you pay a fixed rate of interest for each straight loan. The interest rate is set at the time the advance is drawn down, based on the Euribor rate and an agreed margin. For example, if the Euribor rate is 0.50% and the margin is 3.30%, the interest payable on a straight loan of 50,000 euros with a 30-day term would be 158.33 euros.
You will also be charged a one-off loan origination fee based on the amount of the credit line, a management fee of 23.17 euros every three months, a credit line fee of 0.25% on the average amount of the credit line every three months, and a drawdown fee of 50 euros each time an advance is drawn down.
Business credit facility versus own funds
Some business owners choose to use their own funds for their working capital due to interest rates. According to Bernard Huyghebaert, Working Capital Expert at KBC Brussels, the return on your own funds should ideally be higher than the interest rates. Working capital financing allows you to keep your own funds free for strategic investments that yield much higher returns, such as optimising your production process, acquisitions, investments and so on.
Using a credit facility for your working capital may produce higher returns than using your own funds.
Bernard Hughebaert, Business Development Manager Business Banking
Work out your working capital financing rate
After an advance in current account, a straight loan, or both? Work out your personal working capital financing rate.