SEEKING TO REDISCOVER HUMANITY? CLICK BELOW ▼

A Guide to Working Capital

You may have heard the term ‘working capital’ before, but do you know what it actually means? Working capital refers to the difference between a business’ current assets and current liabilities. It is an instrumental indicator of a successful business and can affect funding, inventory, and long-term growth.

To understand whether your company’s working capital is sufficient, it’s essential to first understand what exactly working capital is.

What is Working Capital?

Working capital, sometimes referred to as net working capital (NWC), measures the difference between current assets and current liabilities. Essentially, it tells us what the business owns minus what the business owes. NWC is an effective tool for measuring a company’s short term financial health and operational efficiency.

Current assets refer to the tangible and intangible goods owned by the company that can be turned into cash. These include things like checking & savings accounts, stocks & bonds, mutual funds, inventory, and accounts receivable.

Current liabilities are expenses or debts incurred by the company within the past year and include accounts payable, salaries, accrued income taxes, and rent.

How to Calculate Working Capital?

To calculate working capital, you measure current assets – current liabilities. This gives you an idea of your short-term liquidity and ability to pay off debts.

However, you can also calculate your current ratio, which is measured as:

Current Assets / Current Liabilities = Current Ratio

For the current ratio, a higher ratio indicates better health. The goal here is to be on par with or above your industry average.

How to Improve Your Working Capital

Whether you are applying for a performance bond or are looking to cover short-term debt obligations, positive working capital is key to ensure your daily business operations run smoothly. Here are some tips to help increase your working capital.

  • Improve your accounts receivable. Offer incentives to encourage customers to pay on time.
  • Cut unnecessary expenses. Perform an internal audit of your company to determine any unnecessary expenses.
  • Avoid stockpiling. Working on a just-in-time inventory basis can help increase your NWC by ensuring your inventory is quickly converting to cash.
  • Pay debt on time. Avoid needless expenses to ensure you are not paying penalties and premiums.

While not every obstacle is predictable, preparing will help ensure your business has sufficient working capital in case of financial hardship. Check out this in-depth guide to working capital from JW Surety Bonds to find out more about the importance of understanding your company’s working capital.

BIZCATALYST 360°
BIZCATALYST 360°https://www.bizcatalyst360.com/about/
We are an Award-Winning lifestyle, culture, and business new media digest, serving as the global hub for enhanced performance and well-being. With an emphasis on action, our 500+ international contributors empower people to transition from knowing what to do to actually doing it. All of this complemented by syndication relationships with a choice group of equally innovative media outlets. Today and every day, we simply deliver the very best insights, intelligence, and inspiration available anywhere. And we do it our way, placing our writers and our audience at the forefront. It's timeless. It's evergreen. It's simply good stuff. Period. More About BC360°
Please Login to comment
avatar
  Subscribe  
Notify of

JUST ONE CLICK HERE TO GET YOUR DAILY DOSE

REDISCOVER HUMANITY

"Human beings have an innate inner drive to be autonomous, self-determined, and connected to one another. And when that drive is liberated, people achieve more and live richer lives."

SHARE YOUR JOURNEY

Powerful voices from around the globe that speak to our shared human experience. Add your story to our best-selling book series!

JUST 1 CLICK

IS ALL IT TAKES TO LEARN SOMETHING NEW TODAY

Must Read

JUST 1 CLICK

IS ALL IT TAKES TO BEGIN ENJOYING OUR PODCASTS

JUST 1 CLICK

IS ALL IT TAKES TO EXPLORE OUR INSPIRING GLOBAL COMMUNITIES