Working Capital: What is Working Capital and How to Calculate it?
We sometimes refer to the working capital as the net working capital, and it measures the short-term financial stability of the company. To put it simply, the working capital turnover ratio is a measure that tells us how well the company can repay its debts. You can find this information on your balance sheet by subtracting your current assets from your current liabilities.
A good working capital turnover ratio indicates a company’s short-term debts are less than its cash value. In most cases, they have enough cash left over to pay off their debts with a little left over to spend on expansion.
A negative working capital indicator shows that the business owes more than it holds in cash. Lenders and investors who would provide funding should be wary of such a situation. Nevertheless, this working capital turnover ratio should also be a signal for you to start generating more cash.
Knowing where your walking capital is at
It is easy to calculate working capital, and all the information you need can be found on your balance sheet and know how to calculate working capital. Don’t have one? Don’t worry; there are ways to see how to calculate working capital on your own. You can assess your working capital limits by using this formula.
Working Capital=current assets- current liabilities
What are your current assets?
You need to know your current assets and liabilities in order to calculate your total working capital. Among your current assets are cash you have on hand as well as anticipated cash inflows. Stock, marketable securities, receivables, and cash equivalents constitute your inventory value.
Where are your current assets listed?
Your balance sheet lists all of these values. Most companies, however, start by checking their bank statements. Some companies even use billing software to track receivables. They are likely using good inventory management software to manage their inventory.
What are your current liabilities?
Your current liabilities are your short-term debts due within the next year that you will be able to pay off soon. In addition to outstanding wages, there are balances due on credit cards, payable, outstanding loan balances, and accrued liabilities, such as income tax.
Where can you find your current liabilities?
To get an idea of your accounts payable value, track all unpaid invoices. Your provider will provide your credit card and loan balances. Your payroll records will provide you with information regarding tax liabilities and outstanding wages.
What is your working capital, and what does it mean for your business?
You can easily determine your working capital amount once you have all of this information available. In this case, it means you were able to pay off your short-term debt while having cash available. Therefore, by reinvesting in your business, you have the opportunity for growth. Additionally, you can take on more short-term debt if you need it.
However, you should look for ways to increase your cash flow if the value is negative. Companies normally run sales campaigns quickly or consider refinancing short-term debts to generate higher revenue.