How To Calculate Working Capital

Did you know that working capital is the most important asset that any business can have? But what is working capital? How does it help? When do you need it? And if you do need it – How do you get it?

These are all valid questions that most likely have run through your head at some point in time. Let’s take a look at what working capital really is:

So, What is Working Capital?

Working capital is defined as the capital of a business that is used to run its day-to-day operations.

How to Calculate Working Capital

Calculating working capital relies heavily on your assets versus liabilities (which can be found on the balance sheet of your financial statement.)

Current assets are assets that a company expects to turn into cash within one year. Some examples include cash (obviously), accounts receivable, inventory, etc.

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Current liabilities are short term debts that a company expects to pay within one year. Examples include loans or debt, payroll, etc.

Working capital is calculated as Current Assets –  Current Liabilities

Appears to be an easy calculation, right? Yes, it really is. However, the confusion with working capital doesn’t come from the straightforward equation. The difficulty occurs post calculation when it’s time to analyze your findings.

Benefits to Calculating Working Capital

As previously stated, working capital can easily tell you if you’re managing your inventory, debt, accounts receivable and accounts payable correctly.

What if your calculation results in a negative number? Let’s not automatically assume that you’re purchasing too much inventory. Think outside the box: Many companies simply just do not have a stable revenue stream, and it’s possible that the reason behind negative working capital is because you aren’t getting paid until 60 or even 90 days post sale.

Other the other hand, working capital can result positively. While business owners at first glance would be very pleased with this, there may be a downside to it. What if it’s resulting in unhappy employees? Could this mean that you have leftover funds because you aren’t staffing enough employees? This can mean that you are overworking already hard-working employees, leading to reduced morale.

Breaking Down Working Capital

When a company’s liabilities exceed their assets, most businesses consider a working capital loan. These types of loans are extremely popular and help to finance everyday operations.

Don’t get caught wondering what financing option is best for you. Instead, contact CMS Funding to learn how your business can benefit!