Does Your Business Have an Adequate Working Capital?

If you own a business, you have to be sure that the whole procedure and everything related to these processes are flawless. The company looks forward to a goal within the year or the next five years, but most importantly there are day-to-day operations that should be performed to realize your business vision.

A financial aspect that can be discussed from this angle is having adequate working capital.

What is working capital?

Working capital is defined as the amount of money available for the day-to-day operations of a company. It affects the business in numerous aspects from simple needs such as keeping the facility well-ventilated to more complex processes such as replenishing the inventory.

The working capital reflects the present condition and the survival rate of a business, signifying the level of adequacy of resources for the short-term goals and obligations of the company.

Components of working capital

To better understand the working capital, here are its components to remember

  • Current assets – these refer to resources that can be quickly converted to cash, which include inventory, accounts receivables, cold cash, investments, and other liquid assets.
  • Current liabilities – these pertain to the debts and financial obligations of a company due in a year, which include accounts payable, short-term loans, and long-term debts.

How do you calculate your working capital?

To compute the working capital ratio, use this formula:

Current assets ÷ Current liabilities = Working capital ratio

Working Capital Ratio means determines the financial status of the company. Ideally, current liabilities should be lower than current assets.

To compute the Net working capital, use this formula:

Current assets – Current liabilities = Net working capital

Net Working Capital pertains the amount the company has for its daily operations. When using this computation, only use short-term assets or resources that can be converted into cash within 12 months as minuend.

GDFI Business Loan

Benefits of adequate working capital

A good working capital ratio gives these advantages to your enterprise:

Establishing solvency

Solvency refers to the ability of a company to manage its debts and financial obligations. This shows how efficient the business is and the level of stability that the operations can establish.

Getting easy loans and discounts

High solvency brings a positive reputation for your company and that enables you to a lot of rewards. Banks and financing institutions will feel secure with your financial standing, resulting in an easier business loan approval. Your good relationship with your suppliers may also come with cash discounts from your bulk purchase or regular subscription.

Uninterrupted delivery of wages and daily transactions

Well-managed working capital can afford financial needs of day-to-day operations without any disruption. It would also mean that the salary of employees is given out without delays and other daily
commitments are met, boosting the morale of the workforce or the production of the business.

Earning the trust of investors

If the return of investment is not immediate, investors want regular earnings from which they placed their money. A company with a remarkable working capital ratio easily gets the approval of investors as
they’re assured that there are enough funds for the dividends. It opens the door to a bigger opportunity for your business.

High morale, security, and resiliency

With sufficient working capital, the company creates an environment where there are order and security. The relationship with clients, suppliers, and the workforce are forged and maintained with confidence as the operations and financial standing of the business are efficient. The high morale makes your business become a favorable brand, investment, or workplace.

The capital adequacy does not only create a positive venue for clients, suppliers, and employees. There is also full confidence that the business is protected from ill events that may deplete the resources or
worse cause the downfall of the brand. Working capital also covers how a business responds to unforeseeable events.

Tips to improve your working capital

Here are a few ways to manage your daily financial resources:

  • Check and keep track of your working capital ratio.
  • Optimize your cash flow by improving expenses and inventory management.
  • Automate your accounting system and utilize data analytics to assess business performance.
  • Negotiate with your vendors, suppliers, or distributor for good deals and payment arrangements.
  • Identify the risk from customer’s profile and enhance their customer experience.
  • Take advantage of tax incentives. Never miss your tax obligations.