How to find working capital is a scale by which your measure the liquidity through which your business operates. Working capital can be in the form of cash or any other asset that your business owns.
This is the capital that you have ready on your hands so that you can pay bills and cater to expenses which are small or short-term. Do you want to know more about how to find working capital? Then you have arrived at our destination. Read the article below to know more about working capital.
In this extremely competitive world of business, if there is a mantra that will bring you sure success, then it is working capital. Knowing how to find working capital right, will give you more information on your business and what decisions you are capable of taking.
If you have a high working capital then you can be assured that your business is doing well and you can move towards further development. This says that your working capital is positive and it is a good sign. This means that you have enough liquid cash on your hands to meet everyday expenses.
On the other hand, if you calculate and find out that you have a low working capital, then you need to take immediate action to make your finances stable. This is what we call negative working capital and might speak of a crisis in the company.
The company might have a lot of fixed assets but it needs to have liquid cash to pay off creditors, employees, suppliers, etc. This will surely need good working capital and you need to turn negative working capital into positive working capital.
Know how to find working capital
The easiest and the most popular formula to find out your working capital is to subtract your present liabilities from your present assets. This should give you the exact working capital you have, in dollars. If you want to be a bit more advanced then you could even try to find out the ratio of the working capital.
If you divide your present assets by your present liabilities then you will get a clear ratio of your working capital. These two formulas will give you an idea of the liquidity your company has in short-term.
How to find working capital on a balance sheet?
Be it just working capital or its ratio, both of them are done of balance sheets. The first thing to do is select a time span in which you would want to calculate the working capital. The time gap may vary form one year, one month, or even fifteen days.
The second thing you need to do is to go to the section where the assets of your company are mentioned. The list will typically be done in order of the liquidity of your assets; this means that the assets of your company that are current should appear at the beginning of that list. Now, all you need to do is to add up all the current assets that you can see and then you will get the total of them.
Now we arrive at the liabilities. Here things change a bit. The order in which the liabilities are listed, concentrates on their due date. The liabilities of your company that are current will mostly be there at the beginning of the list. So, just add up all the liabilities to get the total.
Next we arrive at the final part. The two total numbers that you received after adding both the assets and the liabilities need to be looked at. This needs to be followed by subtracting the total of liabilities from the total of the assets. The result that you get will be your working capital amount for the given time period that you selected and were basing your calculations on.
Why do you need working capital?
If you do not have working capital, then the current operations in your business will soon fall short of funding. Having working capital will keep your present operations functional and let you fulfill your short-term goals. Here are some of the most common expenses that you might have to incur in any business and these can be covered with working capital:
• Payment of employees
• Paying off debts
• Rent expense
• Buying daily commodities
• Other additional expenses
If you see that your working capital is letting you manage all the above mentioned costs conveniently, then it means that your business is open for opportunities and it is flexible. This also means that your business has an avenue for growth and development.
Working capital is very crucial in a business; it can make or break your company. If you see that your business assets are not more than the liabilities of your business, then it means that your working capital is running very low and you need to fix the condition immediately.
Do not let your working capital run too low as it might even lead you to getting totally bankrupt, which means you might have to shut down your business. This is why knowing how to find working capital is of utmost importance.
Learn to handle your working capital
We agree that finding out your working capital and learning how to find working capital ratio is very important for every businessman. But doing just this will get your business nowhere.
After you find out the working capital, you need to know how to handle it. Responsibility is the key and you need to manage the working capital well so that your finances stay stable. This will also make your accounts secure so that you do not have to take any further debts.
We know that managing the working capital is not child’s play for everyone. This is why we have prepared a basic list that states some very useful measures you can take to handle your working capital well:
• Make your collection technique better
If your business has a lot of its working capital locked in the invoices of customers that are not yet paid, then you need to manage your collection technique with more caution. A lot of companies face this issue and this might harm the finances of the company because of the unpaid statuses of the bills of customers.
You could offer incentives to your customers to make them pay faster, you can try to make the invoices reach your customers even earlier, etc, to gear up the collection technique.
• Make payments on time
You might think payments do not matter when it comes to working capital but this will help you in long term. If you have fewer pending payments to make then this makes your relations better with the suppliers. In this way you can negotiate better and even gain better transactions which might be very favorable for you. This is why, making all the payments on time is very crucial.
• Keep a track of your expenditures
Always keep a track of all your expenditures, no matter how small or inconsequential they seem. Any amount that you spend is subtracted from your working capital. This is why you need to carefully look at your expenditures and subsequently control it.
As the owner of your business, you can draw boundaries where the employees need to stop when it comes to spending. You can even cut down on the expenses that can be done away with, like entertainment.
• Redirect cash to your business
This step is the most important of all. If you want to be a pro at managing working capital then redirecting money to your own business is the key. This pro tip lets you fulfill your short-term goals. You need to always have some working capital on your hands to cater to any kind of daily expenditure and the rest should be fine.
You can reinvest in your own company by saving up for later so that you can buy latest equipment, infrastructure, etc. Another great idea is to reinvest in the advertisement of your company; you can go for ads or create an event so that people get to know more about your company.
You should think out of the box, be smart, and invest in creating more avenues for your company and increasing the audience for your business. Everyone uses working capital for their daily expenses. Be a bit different and indulge in ideas that will prove to be beneficial for your business at a much later period.
By now we know how important working capital is for the growth of any kind of business. However, you need to constantly keep an eye on the status of your working capital. You also know how to find working capital by now.
We suggest that you find it out as soon as possible so that you can manage your expenses better. Use your working capital to boost the success of your company. Do not borrow unnecessarily, and borrow only when it is absolutely necessary, and lastly, remember to pay back the debt at the earliest.