Negative Working Capital: Causes and Solutions

Posted on Dec 10, 2024 in Economy

**Negative Working Capital: Causes and Solutions**

The working capital provides information about the degree of adequacy of the financial structure and investment made by the company. It must be positive and sufficient to secure the short-term performance of the company and to ensure the stability of the financial structure. If negative, it means that part of the long-term investments are financed with short-term callable funds, which may cause the company to have problems paying debts and be near bankruptcy.

**The Marketing Plan**

The marketing plan will provide information on the marketing of the product or service.

  • We define the product/service to be marketed, product policy. We consider the number and types of variants, quantity, brand, packaging, design, innovative aspects, and the phase of the product lifecycle. These features will be compared with the products/services offered by competitors.
  • It will be released as to how the product/service will be specified, communication policy. We describe the most appropriate means (Internet, local press, leaflets, etc.) and actions (advertising and sales promotion) through which we will showcase our product/service. Advertising aims to promote our products or services, while sales promotion will be joint marketing activities that support the sale and encourage the purchase of our product/service by potential customers.
  • It will indicate how it will reach the customer, i.e., the distribution policy. Specify whether to use direct or indirect sales. If you are involved in indirect sales, detail the ways and channels of distribution (wholesale, retail, or both) through which the product/service will reach the customer. The role that intermediaries (agents, distributors, representatives, etc.) can have can be critical and help distribution.
  • It will be sold at what price, price policy. It will detail the most appropriate pricing strategy for our company in order to fix the price of the product.

**The Feasibility Study**

A feasibility study is to analyze the business project, both internal data and the project company environment. This study determines the desirability of creating the company or not. The following will be analyzed:

  • The legal feasibility of ensuring compliance with regulatory and legal obligations in all areas.
  • Commercial viability: must determine the sale of the product and its development within the market.
  • Economic viability: check if the activity of the company will generate profits.
  • Affordability: company investment plan and financing viability.
  • Environmental: verify that environmental regulations are respected, ensuring the preservation of the environment.
  • Others, such as technological feasibility, must verify whether the technology is adequate to ensure quality production.

**The Business Plan**

The business plan is a strategic planning tool that affects all areas of business for a long time and is intended to analyze the feasibility of the proposed business, examining its goals and disadvantages. Advantages:

  • To analyze whether the business idea has a chance of success.
  • Plan from the current situation to promote a proper desired future.
  • Management, organization, direction, and control of the business (internal benefits).
  • External benefits: get external resources, convince suppliers and customers.

**The SWOT Analysis**

The SWOT analysis (Weaknesses, Threats, Opportunities, and Strengths) aims to determine, from an internal point of view, the strengths and weaknesses that characterize a company. And, from a standpoint external, threats and opportunities that exist in the economic environment where the company has developed. This approach is used in the analysis of business projects to assess whether the business idea that developers have has a chance of success.

**Data from Competing Agents Involved in the Commercial Environment of the Company**

  • List of companies offering the same products or substitute products.
  • Location, location, and spatial economic area.
  • Service offering to its customers as a complement.
  • Value clients have with their money and policy discounts.

**Business Idea**

The study of ideas is the first step to develop a business project. Sometimes, entrepreneurs already have an idea that must be improved, refined, or completed. Others have an idea and initiate a process of wider research. An example of a process could be the following:

  1. Brainstorming.
  2. Filter of ideas or proposals.
  3. Comparison of ideas.
  4. Evaluation of ideas.
  5. Selection of the business idea.

**The Financing Plan**

The financing plan includes the initial financial structure of the company, specifying the different sources of steps to cope with the initial disbursement according to the requirements and features specified in the investment plan, and defining the quantities that must obtain their own resources and outside resources. All this is planned for a time horizon expected for the duration of the business project. In the beginning, the funding that is needed will equal at least the amounts specified in the investment plan, so the company can start its activity with an appropriate financial structure with no risk of insolvency. Once the activity has begun, the cycle of exploitation must provide self-financing, with additional offers from other outside sources, sufficient to ensure future business growth.

**Advantages of Developing a Business Plan**

The advantages of developing a business plan are not reduced only to analyze the extent to which the business idea is exploiting the possibilities of success. Additionally, the role of planning is to create a bridge between the real current situation and the desirable future. Indeed, this planning is based on sound management that is based, as far as possible, on a particular organization, direction, and control of the business that otherwise would be almost impossible (internal benefits). Moreover, on the basis of planning, it is made easier to obtain external resources that allow the proper development of the company, and also easier to convince suppliers and customers (external benefits).

**Proceedings Before Social Security**

  • Registration of companies in the General Treasury of Social Security to obtain the number of businesses and open the main contribution account.
  • Election of the entity that assumes the risk of coverage for occupational accidents and occupational diseases.
  • Registration in the special regime for self-employed (if applicable).
  • Membership and registration of workers in the general scheme.

**Building a Company**

The necessary productive factors for the economic activity of the company are:

  • Natural resources
  • Labor
  • Capital
  • Organization and entrepreneurial capacity
  • Technology

**Variables of the Entrepreneurial Initiative**

The variables of the entrepreneurial initiative are considered those endogenous and exogenous factors that stimulate and allow the creation of a company.

**Endogenous Variables**

They allow the creation of a company; that is, they are elements that originate within the scope of the entrepreneurial initiative:

  • Entrepreneurial and business capacity: provisions and personal wills that a person can make to face the risk in a responsible manner, that is, the ability to negotiate, make decisions, evaluate threats and opportunities, and administer and manage a company.

  • Business idea: The basic idea on which the entire business project is based. Specifically, it refers to the business activity or innovation that you want to carry out in practice. It is often a fundamental variable since the exploitation of a specific application of a new or already existing practice stimulates the entrepreneurial initiative.

  • Self-employment project: The personal will to work in an unfavorable environment due to the existence of unemployment, forcing many people to consider the possibility of providing themselves with the occupation they need, through their own business project.

  • Resources – provision of material or financial: A person possesses certain material resources (a local building, machinery, transport element) or financial resources (accumulated savings, own capital, inheritance).

  • Technical and professional knowledge: These variables are commonly known by the Spanish denomination with the know-how, that is, the technical knowledge on which the business initiative or a very new business idea is based. These endogenous factors are not necessary variables, but one variable or a set of these variables can become a variable that stimulates the creation of a company.

**Exogenous Variables**

They allow the creation of a company, that is, those elements that originate in the environment or external environment of the entrepreneurial initiative:

  • Location: The place where the business wants to locate. It often becomes fundamental since it allows taking advantage of favorable opportunities in the environment.

  • Markets at various levels – uptime: For sales (proximity to customers), for purchases (proximity or ease of access to suppliers), and for the labor market (ease of contracting and having enough workers with the desired qualification).

  • Public infrastructure: The level of development of the environment in terms of communications, transport, and urbanization can facilitate the creation of a company since it can find more facilities for its development.

  • Economic situation: A favorable economic environment at a time of economic boom; in this way, investment decisions are easier with less uncertainty.

  • Favorable institutional environment: Programs of public subsidies and investment grants, tax credits, and legislation favoring the creation of companies. Often, public administrations encourage the creation of companies for different reasons.