What is Working Capital?
Working capital is a measure of both a company's operational efficiency and its short-term financial health. Your business' working capital is the amount of capital you have available for ongoing, day-to-day operations. A lack of working capital has been cited as the number one reason most businesses fail during their first two years.
How Can You Calculate Working Capital?
A simple formula for calculating working capital is current assets-current liabilities.
Working capital can be calculated by determining the difference between all of your current assets (cash, accounts receivable, inventory assets) and your current liabilities (accounts payable, accrued expenses, short-term or current portion of your credit card or other debt, etc.).
Why is Working Capital Important?
Having adequate working capital not only helps you to meet your commitments, but it is also a crucial part of creating business growth. Taking the time to calculate and monitor your working capital on a regular basis allows you to plan, invest and make other operational decisions that will correspond with the availability of cash without putting your business at risk. The working capital cycle of a business should be managed as an efficient and steady cash flow system. If managed productively, it can become one of the business’ most compelling and competitive advantages.
Fortunately, there are systems and processes available to help you forecast the working capital available to your business.
At L.A. Financial Management, we believe efficiency is key. We work with our clients to make sure these systems and processes are set up and working. We specialize in helping our clients streamline processes and grow their businesses.