Well, in the words of Wikipedia it’s current assets. Assets being MONEY!! Current assets aside from money can be accounts receivable (money that is owed to you), short term investments, inventory that converts to cash & some prepaid liabilities. Working capital might be also known as net current assets and or current capital.
Well, what does that mean to me a small business owner?
Well, aren’t we all interesting in working capital? We all want more money and cash on our hands for new projects, purchase more inventory, increase our advertising budget, fund new investments or anything else that would help grow our business. How to get working capital is the fun part. If your short on cash a credit card or line of credit could be your emergency fund or a means to help advertising and bring more working capital. Bringing in more revenue would grow your business and in turn grow your working capital.
Negative working capital would mean that your company is carrying too much debt. Most likely your monthly expenses are outweighing your monthly income. Companies that have negative working capital would benefit by having more credit cards, lines of credits or loans to help through times that aren’t as flourishing. Having a safety net like a business line of credit could be more beneficial than one might think. The more working capital you have generally means that your company is successful and has more cash than debt.
A balance sheet is a very important tool in calculating your current working capital. The reason why most people look at their balance sheet is because they are interested to see their “WORKING CAPITAL”. It tells you what you would be left with if you paid off your liabilities and collected all your accounts receivables. You can clearly see if you are in the RED or in the BLACK.
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