Working Capital Pt. 1
Understanding basic concepts and how they may affect your business is a key factor to any start-up or maintaining a current company. Working capital is one of the basic concepts that owners should know and be able to calculate. Working capital at its core is defined as, “the amount of a company’s current assets minus the amount of its current liabilities,” or more simply, “a company’s available capital for daily operations at any given point in time.”
The calculation for working capital is current assets minus current liabilities. Current assets come down to two accounts which are accounts receivable and inventory, current liabilities are accounts payable. Another consideration is when determining working capital is to consider the current portion of debt which is payable within 12 months. This is a crucial consideration because debts are typically short-term claims secured against long-term assets. The takeaway is having money tied up in long-term assets can hinder your working capital and it make it harder to gain lenders or investors support.
In general, positive working capital is viewed as a good thing by investors and lenders, who may be the groups offering money to expand or continue operations. However, it’s worth noting some types of businesses operate with a negative working capital, such as inventory based businesses.
All in all, working capital is an important aspect used to determine a company’s viability and efficiency. If you have questions about a prospective business purchase or your business’s long-term outlook, contact us at the Center for Financial, Legal & Tax, Inc.