Working capital is basically the amount of liquid assets a business needs to meet its expenses over a short term period of time. To determine working capital needs, you will typically have to consider the regular, day-to-day expenses you have in the course of running your business as well as the debts you owe. Ideally, you should have working capital that exceeds your operating expenses and debts. If your working capital is less than the amount you need, your business may face financial difficulties.
To determine your working capital needs, you will usually have to consider the expenses you have for running your business. This includes such things as payroll, inventory, and supplies that are needed for the successful running of your business. It may also include such expenses as insurance, taxes, and repairs. If equipment replacement is a regular part of running your business or you regularly need legal advice or consultations, these costs should be included in your expenses as well.
You will typically have to include debts when determining your working capital needs as well. For example, you may owe money for business loans or equipment leases. These debts are usually considered when you are determining the amount of money you need to keep your business running efficiently and possibly even growing.
Once you have added up your regular expenses and your debts, you may add the figures together to come up with the amount of working capital you need. For example, if your expenses and debts total $10,000 US dollars (USD), you will need at least $10,000 USD in working capital just to meet your obligations. If you have less than this amount, you are said to have negative working capital. If you have this amount or more, on the other hand, you have positive working capital.
While you can determine your working capital needs on your own, there are online calculators you can use to obtain a realistic figure. To use this type of calculator, you’ll usually need to enter a number that represents the total amount of assets you have that could be converted to cash as well as a figure that represents your total liabilities. Some calculators may also ask you to provide a percentage that indicates your desired level of annual growth.
It is not unusual for a company to have less working capital than it needs for a short-term period. A continuing inadequacy of liquid assets may be more cause for concern, however. In fact, investors and lenders may consider a company’s working capital figures in deciding whether to invest or lend money.
