How To Calculate and Improve Working Capital
Working capital is the money you have available for business needs. It includes money you have in your company’s bank account and cash that you haven’t deposited yet. It also includes things such as inventory, property assets, and accounts receivables. All of these things can be used to finance business growth. Your total working capital can give you a good idea of how healthy your business is.
How Do You Calculate Working Capital?
To understand exactly how much net working capital you can use to financing business opportunities, you need to perform a quick calculation. First, add up all of the assets your business currently has. Don’t forget to include any properties owned by your company and finished products that you can sell. Any credit you extend to your customers is also part of your assets, even if you have to wait a month or two for payment.
Next, add up any expenses and liabilities your business has. This includes monthly expenses such as rent, energy bills, taxes, payroll and loan payments. It also includes bills from your suppliers, such as for inventory purchases and marketing costs.
Finally, subtract your company’s total current liabilities from your total current assets. For example, if you have $100,000 in business assets and $30,000 in liabilities and business expenses, your net working capital would be $70,000. This tells you that you have $70,000 available for business growth.
What Does Your Net Working Capital Tell You?
You always want to have more assets than liabilities in your business. In fact, to keep your business healthy, many experts recommend aiming for twice the amount of assets compared to liabilities. In other words, if your liabilities are $10,000, you should have assets of at least $20,000. Why is this important?
Your working capital is what helps you adapt to business emergencies. It generates growth and lets you invest in excellent opportunities. When you have enough working capital, you can take care of countless business needs:
- Payroll
- Taxes
- Inventory
- Technology upgrades
- Marketing
- Customer service
- Hiring
- Loan payments
A healthy amount of working capital makes it easier to qualify for things such as equipment financing and commercial construction loans. This gives you the ability to grow and progress even more. Of course, having too much working capital can also tell you something.
If you have way more working capital than liabilities, it probably means your business isn’t growing as much as it could. Don’t be afraid to put some of that capital to good use for expansion. Invest in marketing, create a business website or expand your services. All of this can lead to even better cash flow.
