3 Tips for Calculating Your Company’s Working Capital
If you’ve recently opened your own small business, you may already be feeling the pressures of maintaining a consistent cash flow throughout the month. As you’ve discovered, adequate cash is essential not only to running daily operations like payroll, inventory and marketing smoothly, but is also needed to grow and expand your business for the future. For this reason, it’s important to get a good idea of what your company’s current working capital is at all times, and to try to keep enough on hand. Your available capital will be an important factor in getting loans or investment partners in the future. Thankfully, it’s not as complicated to calculate as it might sound! Here are a few simple tips to help you work it out.
1. There’s a Simple Formula To Follow
While you can easily get into details, the overall formula for calculating your available capital is actually fairly simple. Your net working capital is equal to your current assets minus your current liabilities. In other words, you’ll need to figure out what you have and subtract any debts. If you have more assets than liabilities, your amount of capital is said to be positive. The more easily you can pay off your debts using your assets, the more liquid your business is. Generally speaking, the more liquid your business, the better for you and for investors.
2. Assets Provide Economic Value
To figure out what your assets are, consider what items your company owns that provide economic value, whether immediately or in the future. These can include piled-up cash, inventory, your accounts receivable, equipment, real estate and more. If you could liquidate them within a year, they’re usually considered to be current assets.
3. Liabilities Include Debt and Obligations
Your liabilities, on the other hand, should include everything you owe, like debts or similar obligations. Your accounts payable, salaries and wages payable and income taxes payable can all fall into this column. If they fall due within a year, they’re considered current.
Running a business entails constant cash flow and adequate working capital, but calculating the amount of capital that you have on hand at any one time can seem complicated. Thankfully, it doesn’t have to be! Keep these three straightforward facts in mind and you’ll be on your way to a deeper understanding of your company’s financial state, a handle on your cash flow and a better fiscal future.
