What is working capital? And why should it matter to your business? Working capital is the funds your business has available to cover day-to-day expenses. Without it, your business could quickly find itself in a dangerous cash-flow situation. Or, worse case scenario, facing bankruptcy.
It’s also important to keep an eye on working capital because it’s what investors consider when assessing your business’ financial health and liquidity; that is, how easily your business’ assets can be sold to generate cash on hand. Working capital can be found through the following, simple formula:
Working capital = current assets – current liabilities
To assess the state of your business’ working capital, you’ll have to look at your balance sheet. There, you’ll find current assets and current liabilities. Your business’ current assets include: cash, inventory and accounts receivable. Your business’ current liabilities include: short-term loans, notes payable and accounts payable.
The Truth about Your Business’ Health
When you subtract your current liabilities from current assets, what is the outcome? Your business’ working capital reveals the truth about your business’ financial health. Believe it or not, it is possible for a business to see a profit and struggle with cash-flow at the same time (e.g. cash being tied up in accounts receivable).
If you end up with a positive amount after crunching the numbers, your business has positive working capital. If the result is negative, it means your business has negative working capital. Therefore, making it difficult, if not impossible, for it to pay off short-term debts. Ultimately, working capital reveals how effectively your business is being managed.
Finding the Best Working Capital Solution for Your Business
Every business’ working capital needs will be different, depending on their type and industry. The goal is to find a provider willing to work with the obstacles your industry faces, while also providing flexible business funding options. Easier said than done, right?
Believe it or not, traditional providers are not the only sources of working capital. Alternative providers like First American Merchant specialize in providing many business types and industries the solutions they need to grow and prosper – regardless of a high-risk categorization, limited time in business, bad credit and other situations (banks typically turn these business owners away).
Don’t wait until your business has sunk into a desperate, negative working capital situation to seek solutions. Make sure you effectively manage working capital, and find solutions that boost your businesses growth before you need them.