The Basics of Working Capital

Working business capital is talked about all the time, but many people do not know what it is or how access to money can alter the flow of their business. If you wonder about the facts surrounding the money flow, how to get access to it, and what it can do for your business, read on to discover the basics of working capital.

What Is Working Type Capital?

Working capital is money, but it is also much more. Sometimes the term refers to the financial short-term health of the company or the amount of liquidity the business has. The term can also refer to the flow of money through the company that allows for trade, liabilities, and active inventory.

What Is the Ratio?

In short, the ratio is used to determine the financial degree of health of your company as measured by a formula of current assets divided into current liabilities. If the result of the computation is two or more, the company is probably investing too much in inventory or has too many outstanding debtors. On the other hand, a ratio near one can be a good indication the company is flourishing, and there are no red flags to prospective lenders or investors.

How Is it Calculated?

The calculation of working capital is rather simple. Add up the number of current liabilities and subtract the amount from the current company assets. Using the sum from the number of accounts you can settle within 365 days, including wages and associated expenses, and the result is the company’s current liability. If you have more assets than liabilities, your company is said to have a positive working type of capital. If the liabilities are greater than the assets, the balance is a negative capital.

What Is Funding?

Funding for capital can come in several ways, though most take the established route when locating money, some are more likely to work the system in adventurous ways. SBA and bank backed loans are the most common ways many business owners use to acquire capital, although other types of direct lenders have started popping up. For the daring, crowdfunding has also become popular as a means of making money for startup companies. Short-term loans of up to 90 days can also be a way of financing small projects for your business.

Without a source of working capital, your business could easily dissolve in a matter of weeks. That is why you will probably hear the term at most business meetings you attend – it is that important. Now you know what business capital is, you can help keep on top of your company’s health by doing a few calculations.

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