Two financial metrics define the health of your business. The first is cash flow, or how much money your company has on hand in a specific period. The second is working capital.

What Is Working Capital?

To calculate this metric, you add up all of your company’s assets, including:

  • Cash
  • Accounts receivables
  • Inventory
  • Prepaid expenses
  • Marketable securities
  • Investments
  • Other receivables

Then, you subtract the liabilities of:

  • Wages
  • Taxes
  • Notes payable
  • Accounts payable
  • Principal and interest payments due on loans
  • Deferred revenue
  • Accrued expenses

The remaining balance is your working capital. This number generally ebbs and flows with seasonal sales cycles and significant one-time expenses. Your company’s balance sheet shows this information in detail for any period you set.

Why Is Positive Working Capital Important?

Managing your working capital ensures your business has the financial resources to cover operating expenses and money to fund growth opportunities. It also shows your business should be able to survive through unexpected business challenges and qualify for a loan, if necessary. A positive balance allows you to create excess inventory before your busy season and hire temporary workers to manage the increased business.

A negative balance indicates your company may have problems paying creditors, suppliers, and employees. As a result, your business cannot grow because no funds are available, and taking on additional debt is not a realistic option.

How Can My Company Increase Working Capital?

Perhaps you have an unexpected drop in sales or a considerable expense coming up you want to cover with cash. There are steps you can take to increase this metric. First, you can add to your current assets by automating your payment monitoring and accounts receivable to increase your cash flow and lessen the need to use working capital for your business operations. Another way to raise additional cash is by selling your liquid assets. A third option is securing a long-term debt to increase your cash without adding too much to your liabilities.

In tandem with increasing your assets, decreasing your liabilities also increases your working capital. Here you can implement all possible methods to reduce your operating expenses. For example, analyze your inventory management plan to prevent product overstocking that could lead to discount pricing or write-offs. Another option is refinancing your short-term debts to a longer-term so the payoff isn’t due within a year.

Taking steps to ensure your company has positive working capital is essential for the health of your business.

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With so many industries out there, it’s impossible to create one loan that suits everyone. That’s why Commercial One Group offers a variety of financial products. Contact us today to learn more!