Working Capital

Positive working capital or Core Capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. Negative working capital generally indicates a company is unable to do so. Different businesses use working capital finance for a variety of purposes. The general idea is that using core capital finance frees up cash for growing the business which will be recouped in the short to medium term. It is therefore the difference between current assets and current liabilities. Current assets is the money you have in the bank as well as any assets you can quickly convert to cash if you needed it. Current liabilities are debts that you will repay within the year. So, it’s what is left over when you subtract your current liabilities from what you have in the bank.

Working Capital Definition

It is money available to a company for day today operations. Simply put, working capital measures a company’s liquidity, efficiency, and overall health.

The Target

Greater than 2.50 x Total Operating Expenses

The Formula

Core Capital = (Cash – Line of credit debt) / Total Operating Expenses

How to keep your Working Capital above the target

An increase in net working capital indicates that the business has either increased current assets (that it has increased its receivables or other current assets) or has decreased current liabilities—for example has paid off some short-term creditors, or a combination of both.

In summary

It goes without saying you need to keep some cash in the bank but it’s not always that easy to keep 2 – 3 months worth. However, focusing on expenses and keeping a daily eye on cash flow will help you not just survive but thrive.
I encourage you to create a report or a dashboard that gives you all your figures whenever you need them. If you don’t have the time or resources to make that happen then sign up for Blue Bean today and you’ll see your metrics within a few minutes.


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