Every business requires funds for its day-to-day operations, and this defines working capital. You may wish to place an order, replenish inventory, or pay your vendors. All these activities along with several others require finances, which working capital provides. Hence, it acts as the monetary backbone of a business regardless of the size and other related factors.
But what is working capital and how to calculate one for your venture? In addition you must also explore the types of working capital and ways that would enable you to improve upon this metric.
While a positive working capital reflects on healthy business practices, the vice versa indicates financial problems.
Working capital decoded
To calculate working capital, first add all the assets of the venture, like account receivables, inventory and cash. Next, add up all the liabilities, like taxes, wages, account receivables and interest rates. Then subtract the total liabilities from the total assets, and treat the result of this computation as the working capital. Having learned what is working capital, next you must explore its components, which are –
Current assets of the venture – These represent assets that can be converted to cash within one year of the venture being operational. Because these ensure the daily functioning of the business, they have a direct bearing on the working capital.
Cash equivalents – For a venture to operate smoothly, funds need to be available for spending. This is where cash comes in, not only because it facilitates daily transactions, but also because it cushions the venture against unexpected financial emergencies.
Account receivables – Money which the business receives from its customers and other sources comes under receivables. Being an important part of the venture’s balance sheet, it can impact working capital and also the financial health.
Account payables – A business must pay off its debt, which is mostly to suppliers, creditors and so on, in order to minimize liabilities. Therefore, understanding this component is crucial to enhancing knowledge on what is working capital and how it can be best managed,
Inventory – When a business purchases goods to sell to its clients and accrue profits, the stock thus generated forms the inventory. How soon the inventory is sold and replaced with new stock determines the success rate of the venture.
Using working capital to boost small business
You can use working capital in the following ways to boost small business –
- Avail a working capital loan – short-term, unsecured or long-term – to ensure the cash inflow for daily operations and transactions;
- In the event that the venture experiences a cash crunch due to delay in receivables, working capital can be relied upon to fill the gap;
- Because working capital loans can be easily availed and require minimal documentation, they remain one of the best financial solutions for small businesses;
- Wear and tear of equipment that forms an inevitable part of every venture can be looked after via the working capital, wherein finances could be used for repair and replacement;
- Readily available money in form of working capital can prove to be a blessing while aiming for high-value bids with organizations that seek financial guarantee;
- Expansion and upgrading are important for a business venture, and these growth aspects are assured through working capital;
- If your venture is dependent on seasonal ventures like farming or tourism, working capital is your best bet for survival during the lean months;
There are different types of working capital that you can avail for your venture. As long as you are aware of the components and learn how to manage them, working capital can actually boost your small business in a number of different ways.
So, if you are still confused as to what is working capital, it is time to explore this option and avail it for the betterment of your small business.