What is Working Capital and How Can I Utilize it?

The Best Ways a Business Can Use Working Capital to Their Advantage

Working capital is a pivotal element for all businesses. Without it, a business would not be able to survive or remain financially stable among its competitors. In order for businesses to succeed, they must truly understand what working capital is, as well as the moving parts that go along with it. Working capital isn’t just extra money a business may have laying around, it’s a way for a business to come out on top.

Assets, Liabilities and Working Capital

In order to understand what working capital is, it’s necessary to grasp the concept of assets and liabilities first. Every single business, whether it’s a large corporation or a small company, will deal with assets and liabilities—the two major components of a business’s financial standing. Assets are anything that a business owns that could bring about economic benefits in some way. Assets include cash, land, equipment and inventory. Liabilities, on the other hand, are defined by the obligations a business has that takes away from revenue overall. Liabilities can be money that has to be paid by the business, or particular services that have to be performed.

Working Capital, Defined

A business’s working capital is the way their financial situation is measured, because working capital ultimately reveals how well they operate on a day to day basis as well as their short-term financial status. In order to calculate what working capital is, businesses must follow a formula commonly used in the accounting world. The working capital of a business can be found by subtracting the current liabilities from the current assets. One of the main markers of a company’s success is when they have more assets than liabilities, so this can be very revealing in terms of figuring out a business’s true financial standing as far as working capital goes.  A good working capital ratio is between 1.2 and 2.0.

Good Working Capital Makes for Financial Success

When a business has a good working capital ratio, their operative process runs seamlessly; needless to say, the business will be able to meet almost any and all financial obligations for the present and future year to come. Since working capital is the money that a business has accumulated at its disposal to pay for expenses, good working capital means that a business will be successful financially. Businesses can use their working capital to cover their short-term expenses, like inventory, operating expenses and even short-term debt. When working capital is calculated as a positive number, a business has more money than it actually needs, which is always a bonus when dealing with any type of business, company or corporation.

Contact Lendr to Learn More About Working Capital

What’s right for one small business in terms of working capital might not be the same for the next. Good working capital definitely varies based on factors like a business’s industry, sales cycles and supplier relationships. Even still, working capital is an important metric to proactively manage. At Lendr, we’re all about empowering business owners by providing them with access to the working capital resources that their business needs in order to achieve financial stability now and in the future. Lendr offers fast, friction-free cash advances to help small and medium business owners focus on growing their own business without financially struggling along the way. We understand important factors such as working capital, we believe in the little guy and we always do things right by our client. Small and medium sized businesses can apply for funding today by calling 888-887-2812.

More articles and case studies...

The Small Business Owner’s Newsletter

Join the list for stories, articles and resources to help you grow your business.

It only takes one click to subscribe.