Title: Working Capital: What Is It and Why It's Important
Headings: What is Working Capital?
What is Working Capital?
What is working capital – and why is it important?
How to calculate working capital
Understanding your needs
4 reasons why your business might require additional working capital
Finding options to boost your working capital
Qualifying for a working capital line of credit
2 working capital missteps to avoid
Get the funding your business needs
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Content: That would generally be considered a healthy ratio, but in some industries or kinds of businesses, a ratio as low as 1.2:1 may be adequate. Your net working capital tells you how much money you have readily available to meet current expenses. Net working capital formula: Current assets – Current liabilities = Net working capital
For these calculations, consider only short-term assets such as the cash in your business account and the accounts receivable — the money your customers owe you — and the inventory you expect to convert to cash within 12 months. Short-term liabilities include accounts payable — money you owe vendors and other creditors — as well as other debts and accrued expenses for salary, taxes and other outlays. Understanding your needs
Getting a true understanding of your working capital needs may involve plotting month-by-month inflows and outflows for your business. A landscaping company, for example, might find that its revenues spike in the spring, then cash flow is relatively steady through October before dropping almost to zero in late fall and winter. Yet on the other side of the ledger, the business may have many expenses that continue throughout the year. Parts of these calculations could require making educated guesses about the future. While you can be guided by historical results, you’ll also need to factor in new contracts you expect to sign or the possible loss of important customers.