When staying on top of your business’s finances, it’s essential to have a good understanding of what working capital is. Working capital is a vital aspect of a company’s financial operations. It shows the difference between the current assets and the current liabilities. The working capital measures a company’s liquidity as well as your business’s operational efficiency and short-term financial health.
Defining Working Capital
The definition of working capital is the difference between a company’s current assets and its current liabilities. Your business’s current assets are cash, customers’ unpaid bills, and complete inventories. Current liabilities are accounts payable. 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 .
Why Does Working Capital Matter?
To know if your business is in good financial health, then you must determine if your business has substantial positive working capital. Positive working capital means you’ll have a great chance to invest and grow your business. If your business’s current assets do not exceed its current liabilities, chances are you will have trouble growing your business or pay back creditors. In worse cases, this could also mean potentially filing for bankruptcy.
How to Calculate Working Capital
The formula to determine your working capital is the difference between a company’s current assets and its current liabilities. To calculate working capital, identify your current assets, which are the assets that are expected to be liquidated or turned into cash in under a year, such as accounts receivable and inventory. Then identify your business’s current liabilities, which are accounts payable, employee wages, taxes, and current debt.
To put it simply, your business’s current assets are going to be what is available within 12 months and the current liabilities are what is due within 12 months. For example, if a business’s current assets add up to $200,000 and their current liabilities are $50,000, then their working capital would be $150,000.
Boosting Your Working Capital
If you find that your business’s working capital is on the lower end of the spectrum, your business may require additional working capital. Luckily, there are solutions such as a Working Capital (WC) Financing Program that can keep your business in good financial health. This type of program is perfect for businesses that have been open for 2 years or more, have annual sales over $150,000, and if your personal FICO score is 680 or higher.