
The Best European Business Bank Accounts for Digital Nomads
If you are looking to make a European escape (at least for a while), here are some options to consider as you search for the best bank account for digital nomads like yourself.
Working capital is a metric used to quantify your company’s liquidity. In other words, it is the amount of money you would have on hand to run your business if you were to liquidate your assets to pay off your current debts. This calculation is an effective way to analyze your organization’s short-term financial health and operational efficiency.
The most commonly used working capital formula to arrive at this figure is:
Assets – Liabilities = Working Capital
A healthy total tells you that your business has the means to meet its short-term obligations comfortably. A small or even negative number could spell trouble ahead for your firm. Knowing the amount of working capital you have on hand can empower you to make prudent choices regarding financial stabilization or even corporate expansion.
Although the working capital formula seems straightforward, it can be complicated if its components are defined incorrectly. What is considered an asset, and what liabilities should you include when calculating the working capital formula? Let’s take a closer look.
The current assets you need to calculate your working capital formula include tangible and intangible resources currently liquid or converted into cash within a year. This would include:
⦁ Cash on hand—Checking, saving, and money market account balances
⦁ Short-term securities—Certificates of deposit or treasury bills, which have relatively short maturity periods
⦁ Inventory—Product that you expect to sell in the near future
⦁ Marketable securities—Stocks, bonds, and ⦁ exchange-traded funds (ETFs) that can be sold quickly and at fair market value
⦁ Accounts receivable—Money owed to you, including checks received that you have not yet cashed
⦁ Interest receivable—Accrued interest that you have not yet collected on loans, notes, or other forms of credit extended by your business
On the other hand, illiquid assets are those that you cannot sell in the short term—either because there is no immediate market for them or because they would lose a significant percentage of their value in the sale. Since they are held for the long-term, do not include the following asset classes when calculating your working capital:
⦁ Real estate—Equity on your property holdings
⦁ Hedge funds—Invested in liquid assets like stocks and bonds, but investors can’t access the funds quickly
⦁ Mutual funds—Traditional funds, as opposed to the more liquid ETFs mentioned above
⦁ 401(k) or other retirement accounts—Accessing before retirement age would incur significant tax penalties
⦁ Artwork or other collectibles—Usually not a big enough pool of buyers to sell quickly and at fair market value
Likewise, the liabilities included in your working capital calculation should only include expenses that your company is obligated to pay within the next year. These include:
⦁ Short-term borrowed funds—Loans, lines of credit, or cash advances taken out by your business with a payback term of less than a year
⦁ Principal payments—The monthly payments to pay down the principal owed on long-term loans
⦁ Interest payable—Accumulated interest on your company’s borrowed funds
⦁ Accounts payable—Invoices that you still need to pay
⦁ Dividends payable—Dividends owed to investors
⦁ Operational expenses—Money paid toward rent, materials, supplies, and utilities
⦁ Accrued income taxes—Tax payments your company has scheduled to make to the ⦁ IRS
Do not include the portion of long-term debts you are not paying back in the next 12 months. Because you are only considering your assets and liabilities in terms of how they will affect your daily finances over the next year, your working capital computations could change month to month or day to day.
For example, you plan to sell a piece of real estate in 18 months. The property’s equity will not affect your working capital today; however, it should be added to your equation in six months because, at that point, you’ll be a year from liquidating the asset.
Although assets minus liabilities is the standard formula, there are alternatives that your company could use. These are tailored to more specific scenarios. Use these alternative working capital formulas in tandem with the standard calculation to determine how particular variables like inventory and cash on hand impact your working capital.
If you want to examine how balanced your daily operations are, use the following formula:
Inventory + Accounts Receivable – Accounts Payable = Working Capital
Or, to take cash out of the equation:
Assets – Liabilities – Cash = Working Capital
These additional calculations can pinpoint what operational area might be dragging down your working capital. You can then make adjustments as necessary to shore up those segments of your business, strengthening your short-term financial footing.
At one time or another, most businesses need more working capital than they have available. Your company could experience a temporary shortage due to:
⦁ Outstanding customer invoices—Even when your customers are slow to pay for the work or goods you’ve provided, your company obligations can’t wait. You still have to pay your business taxes, utility bills, payroll, and rent.
⦁ Seasonal fluctuations—In particular industries like landscaping or retail, income is affected by seasonality. It is elevated for a few months but then drops off during the slow season.
⦁ Bulk buying opportunities—To save money in the long run, you might have a large up-front expenditure for supplies or inventory purchased in bulk at a discount.
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If you are looking to make a European escape (at least for a while), here are some options to consider as you search for the best bank account for digital nomads like yourself.
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