When staying on top of your business’s finances, it’s essential to have a good understanding of what working capital is. A simple definition of working capital is the difference between a company’s current assets and its current liabilities. Current assets include cash, customers’ unpaid bills, inventory, and more. Current liabilities are accounts payable.
The working capital measures your business’s liquidity, operational efficiency, and short-term financial health.
The Importance of Working Capital
Your business is in good financial health if it has substantial positive working capital. Positive working capital means you’ll have a greater chance to invest and grow your business. However, you will more than likely have trouble growing your business or paying back creditors if your business’s current assets do not exceed its current liabilities. In worse cases, this means potentially filing for bankruptcy.
Working capital is the key to your business’s success and impacts sustainable long-term growth. Your working capital is the money your business has available to meet your current and short-term obligations.
Calculating Working Capital
As explained before, the formula to determine your working capital is the difference between a company’s current assets and its current liabilities. When calculating working capital, identify your current assets. These are the assets that are expected to be liquidated or turned into cash in under a year, such as accounts receivable and inventory. You’ll also need to identify your business’s current liabilities such as accounts payable, employee wages, and existing debt.
Your business’s current assets will be what is available within 12 months, and the current liabilities are what is due within 12 months. For example, if a business’s existing assets add up to $200,000 and their current liabilities are $50,000, their working capital would be $150,000.
Boosting Your Working Capital
When you have calculated your business’s working capital and see it is on the lower end of the spectrum, your business may require additional working capital. Luckily, there are solutions for finding working capital funding. When opting for a Working Capital (WC) Financing Program your businesses should have been open for 2 years or more, annual sales over $150,000, and if a personal FICO score of 680 or higher.