Working capital is an accounting term that means the capital used in your business’ day to day operations. It is calculated by deducting one’s current liabilities from one’s current assets, and is a key factor to your business' success. Most of the aspects of your business are affected by working capital. Not only to run your business smoothly but to plan and execute the advancement of your business, you must have an insight into your working capital. Every business has a working capital need that varies according to numerous factors. Since it is primary to operating your business, you need to know how to calculate your working capital needs.
Working capital is what pays your vendors, employees, electricity, etc. and helps your company's growth. Working capital expedites and accelerates your business' effortless functioning and provides you with a proper idea of your company's liquidity position. To put it simply, the funding available with which all your present and short-term business obligations are met by working capital. Nevertheless, there comes a time where working capital is a need for financing. Therefore, it is very crucial to evaluate your company's working capital.
Working capital requirement depends on several factors. While evaluating your firm's working capital need, you need to consider the following:
Type of business
Scope of the company's operations
The working period of converting raw materials to finished goods
Credit terms and the total sales which were made on the credit
Seasonal changes in seasonal businesses
Financial cushion for contingencies. For instance, your company is in instant need of cash.
It is always better to be aware of your company's financial health. Planning strategically is what can lead your business to success which is why you must be informed of your working capital. Since the working capital requirement depends on many factors, you can calculate where you stand by evaluating your working capital ratio. The working capital ratio is the assessment of your business' short-term fiscal health. The formula to calculate your working capital is:
Current assets / Current liabilities = Working capital ratio
To know how much funding your company readily has as of now, you can calculate your net working capital. The formula to calculate your net working capital is:
Current assets – Current liabilities = Net working capital
While calculating working capital using any of the above formulas, you should include only your short-term assets. Short-term assets include the money in your company's account, money that you're yet to receive from your customers, and the raw materials that you can convert to fund in the next year. Short-term liabilities mean the money that you still owe to creditors and vendors, any debts, other outlays, and taxes.
Working capital is a need for financing during your business operations. Working capital requirement depends on seasons, fund obligations, and many more. Reasons why your working capital may require financing include:
Your business needs to duly pay its employees, the government, suppliers, and creditors as you wait for your customers to pay.
Any expenses that are project-related or to pay temporary employees come from your working capital.
Typically, the cash flow is affected by seasonal changes for many companies. This would mean needing more funds to either equip yourself for a busy season or keeping your company afloat during the slow business.
With the help of financing your working capital, you can take advantage to enhance your business. For instance, taking advantage of vendor discounts by buying in bulk.
The simplest solution during the working capital need is a loan. There are several types of working capital loans that are available on the market and some of them include equity funding and a short-term loan. Unfortunately, since working capital is a need for financing, you will need to borrow at one point. However, acquiring funding for running your business is not complicated or difficult. There are many options that you can choose to finance your working capital.
You must comprehend your business' needs for the future. You will require funding whether to expand your company, in dire situations, or seasonal differences. You must be cognizant of your company's financial health by keeping tabs on your working capital. If your business needs funding, you can avail of the Business Loans available on Finserv MARKETS. The application procedure is hassle-free and convenient.