For a business to run, it needs cash. Cash is necessary to keep the operations going and to expand. However, many businesses struggle with their working capital to get things done.
Working capital, also known as net working capital, must be positive. Basically, if your business understands how it works and knows the right formula, you can re-invest in your business and make it grow.
On the other hand, if you don’t have a full grasp of what a working capital is, then you’re going to fail at managing it. Don’t worry, though. We’ll help you out.
All About Working Capital
Your business’s working capital is the measure of your financial health in the short term. Let’s say you’re able to pay your bills on time; that said, you have positive working capital.
You get your working capital by deducting your current assets from your current liabilities. A positive working capital ratio must be maintained. With that, you should be able to pay off your debt while still having money left over to reinvest in the business.
On the other hand, if you have negative working capital, that only means your company owes more than it is flush with. When you have negative working capital, it’s essential you increase your cash flow immediately.
The Main Components of Working Capital
There are four main components of working capital you need to know about:
Cash management: Maintain a good cash balance.
Receivables: Manage your receivables and collect funds owed to your company.
Inventory management: Manage your inventory efficiently to optimise your operations.
Accounts payable management: Paying and sorting out your expenses in a timely fashion.
You can calculate these four major components to come up with your current assets and liabilities.
How to See If You Have Good Working Capital
To determine if your company has good working capital, look at your financial state. If you can pay your bills on time, then it’s likely you have positive working capital.
Knowing about the state of your working capital will help you foresee financial difficulties. It doesn’t matter if you’re a billion-dollar business because that doesn’t mean anything if you have negative working capital.
When you have insufficient working capital, it can lead to financial pressures that will increase your borrowing. In turn, it can lead to a lower corporate credit rating. This means that should there be a need to take out a loan, you will be faced with higher interest rates.
How Is Your Working Capital?
Working capital is the money your business has left over after deducting current liabilities from your existing assets. It can tell you if your company can pay its short-term debts and still have money for operations. When using your working capital, you should use it with other financial analysis formulas for more accuracy.
Figuring out your working capital and maintaining it may be challenging. Therefore, it’s important you seek professional help. An accountant will be helpful at times like this and will help you maintain positive working capital to keep your business running.
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