A business needs enough working capital to cover its operating costs for the days cash is tied up in stock and unpaid invoices, plus a reserve. Rainhaven Business Funding, a small-business funding broker in Columbia, Tennessee, offers this worksheet for Maury County owners; where borrowing fills the gap, lending partners make credit decisions and set rates and terms.
Why small Maury County, TN firms feel this first
Of Maury County's 2,069 employer establishments in 2023, 1,030 (49.8 percent) had fewer than five employees and another 417 had five to nine (U.S. Census Bureau, County Business Patterns 2023). Businesses that size seldom carry a large cash cushion, so a slow-paying customer or a big stock order shows up in the bank balance within days.
Two numbers called working capital
Accountants use working capital to mean current assets minus current liabilities: cash, receivables and inventory, less bills and debts due within a year. The working capital ratio divides the first by the second. A ratio below 1 means short-term obligations exceed short-term assets. There is no universal good ratio; a business that collects cash daily can run leaner than one that waits sixty days for payment.
Owners asking how much working capital they need usually mean something more practical: how much cash do I need on hand, or available, to keep paying bills while money is tied up? The operating-cycle method answers that.
The operating-cycle worksheet
- Days in inventory: how long stock or materials sit before they are used or sold.
- Days to collect: how long customers take to pay after you invoice.
- Days to pay: how long you take to pay suppliers.
- Cycle days = days in inventory + days to collect - days to pay.
- Daily operating cost = monthly payroll, rent, materials and other operating costs, divided by about 30.
- Working capital tied up = cycle days x daily operating cost.
A hypothetical specialty contractor
Take a hypothetical four-person trade contractor with monthly operating costs of $30,000, about $1,000 a day. Materials sit about 10 days before installation, customers pay 45 days after invoicing, and suppliers are paid in 20 days. Cycle days are 10 + 45 - 20 = 35, so roughly $35,000 is tied up at any time. If the contract also withholds retainage, add the retained balance on open jobs; the retainage article shows how that builds. These figures are for arithmetic only.
Add a reserve
The worksheet gives the amount tied up in a normal month. Add a reserve for the unexpected: a customer paying late, a repair, a slow month. Some owners hold a set number of weeks of operating costs; others size the reserve to the largest single receivable they could lose. Pick a rule you can explain to a partner, and write down why.
Signs your number is too low
- Supplier payments slipping past their due dates
- Payroll timed around which customer pays first
- Card balances used for routine operating costs
- No room to take a larger job without turning another away
Borrow it, or build it?
Retained profits are the cheapest working capital, but building them takes time. Borrowing fills the gap sooner at a cost. A business line of credit suits a gap that opens and closes repeatedly; working capital financing suits one defined gap. Many owners use a line for the cycle and build the reserve from profits over time.
If you are weighing a term loan to fund a permanent increase in working capital, run the payment through the term loan repayment calculator to see the monthly payment, total interest and total repaid.
What to bring to a funding conversation
Your cycle days, monthly operating costs, receivables aging and the reserve rule you chose. Those turn a vague request into a sized one. Census counts for local employers give the county backdrop, and the funding articles cover related topics.
By Rainhaven Business Funding ยท Updated