Working Capital Basics
Know the foundational functions of working capitalWorking capital, often referred to as net working capital or operating capital, measures a company’s ability to operate in a financially efficient and healthy manner. For a small business, working capital is a lifeline for success. Without working capital/available cash, a business is unable to meet financial obligations or capital requirements needed to cover costs of operations, reinvestments and other liabilities.
Making short-term decisions based on cash flow and profitability is the goal of working capital management. These decisions determine a business’ ability to continue operations with sufficient money flow to pay for short-term debt and operational expenses. Being able to maintain this balance of income and debt stabilizes a business and increases their potential for growth. To understand working capital basics, keep the following information in mind:
1. Working capital calculation measures a company’s ability to succeed.
2. Working capital formula helps determine the amount of working capital available.
3. Business working capital provides evidence of the long-term viability of a business.
Clarify the cash fluidity of a business with working capital calculations
Use working capital to provide vital information for managersWorking capital management involves managing the relationship between working capital and short-term liabilities. You find your working capital by subtracting current liabilities from capital assets. Positive working capital gives you the money to pay off short-term liabilities. Managing working capital appropriately increases a business' opportunity to invest and yield a return for the investors.
Incease the possibility of working capital financingCalculate working capital to explain how your company manages its cash flow. With working capital finance results, the profitability of a company is clear; investors want to see these operational efficiency figures. In addition, banks often require working capital figures from a specified period for a comprehensive picture of a company's long-term performance.
- Watch business working capital ratios, if there is a decrease, locate the negative cash flow effect and make improvements.
Copyright © 2013 Business.com, Inc. All Rights Reserved.