Running a business and being oblivious to the term of working capital is not something to be proud of. In order to make sure that your business is in good hands for an extended period of time, you must make yourself familiar with the term “Working Capital”. Working capital is the calculation through which you can pay your liabilities through your current assets. This might sound like a not-so-easy calculation, but in reality, its role is much bigger than you can imagine.
What is the importance of a working capital?
The productivity of a company greatly depends on its liabilities and assets. Assets refer to the money a company has in store, while liability is basically the money a company sustains from various external sources for over some time of one business cycle. To keep a company’s financial status healthy, it must keep track of the working capital as its scale determines the growth meter of the company. As mentioned in the infographic, working capital holds significance for several reasons, like expanding your business, crisis management, attracting more clients, etc.
The formula of working capital
Working Capital = Current Assets – Current Liabilities
What do the results of calculated working capital mean?
There could be three possible results after applying this formula: positive working capital, negative working capital, and zero working capital.
- Positive working capital suggests the potential growth of the company.
- Negative working capital suggests a serious risk
- Zero working capital suggests a balanced proportioned sheet of liabilities and assets.
Many businesses fail when they find themselves in the position of negative working capital. This situation might be critical, but it is not impossible to overcome. With a few smart decisions, you can easily manage to pull a balanced sheet of your company.
Every business has a different working capital requirement, but if the company incurs assets in abundance, it is guaranteed to have a potential growth in the future.
