Why Is Working Capital Important?

 

Working capital is a barometer of your firm’s short-term financial health and can affect inventory, funding, and business longevity. It is vital to keep track of your business’s working capital to ensure you or your financial team sustain operational efficiency and company health.

You may not discuss working capital every day, but this financial term is pivotal to your company’s prosperity. Working capital influences several aspects of your firm, from paying vendors and employees to keeping the rent paid and gearing up for sustainable long-term growth.

To ensure your working capital is functioning to its full potential for your business, you should work out your current levels, forecast future needs, and contemplate methods to guarantee you are never short on cash. Continue reading to find out why working capital is important and how to obtain more of it.

Understanding Working Capital for Your Company’s Success

When it comes to measuring financial performance, many company owners emphasize their bottom line. However, working capital is likely a better number to watch to determine whether your firm is sinking fast or staying afloat. The formula is:

Assets – Liabilities = Working Capital

The answer to this calculation should be a positive number. If it’s a small or negative number, it demonstrates a lack of working capital and means that your business could run out of money. Knowing this figure can ensure you make wise choices about stabilizing or even expanding your company’s finances.

Current Assets

Current assets are tangible and intangible resources that are currently liquid or can be liquidated within the year. Examples of current assets include:

Accounts receivable—Including checks received but not yet cashed and other money owed
Cash on hand—Savings, checking, and money market account balances
Interest receivable—Accrued loan, notes, or other interest that has not been collected
Inventory—Any goods you anticipate selling in the near future
Marketable securities—⦁ Exchange-traded funds (ETFs), stocks, or bonds that can be liquidated at fair market value
Short-term securities—Treasury bills or certificates of deposit with short maturity periods

Long-term assets, including real estate, vehicles, and 401(k) retirement accounts, are not considered current assets either because they are either needed to operate your business or would lose a significant portion of their value during a sale.

Current Liabilities

Current liabilities include the loan and bill payments your business must make within the year. For long-term loans, including real estate or equipment, you would only use the portion you would need to pay over the next 12 months. The rest of the payments would be included under your long-term liabilities. Other current liabilities include:

Accounts payable—Unpaid invoices or other money you owe to clients
Accrued income taxes—Tax assessments your firm plans to make to the ⦁ IRS in the next year
Dividends payable—Dividends your business owes to investors
Interest payable—Total interest your firm pays on borrowed money
Operational expenses—Supplies, utilities, payroll, and rent supplies
Short-term borrowed funds—Cash advances, lines of credit, or loans taken out by your business with a 12-month-or-less payback term

Because your assets and liabilities are calculated in terms of how they impact your daily finances over the next 12 months, your working capital calculation could fluctuate monthly or even daily.

The Importance of Working Capital

Having a healthy amount of working capital available allows your firm to grow and invest. Conversely, if its liabilities continually exceed current assets, your firm may have difficulty paying back creditors or growing operations. You can help your business retain and improve its amount of working capital by increasing current assets, inventory, accounts receivable, and adequately managing cash flow.

The following are some reasons your company needs working capital:

Bringing on investors or obtaining credit—If you are looking to raise funds, potential investors and creditors may view an insufficient amount of working capital as a red flag.
Being ready for emergencies—Similar to your personal finances, having a reserve of emergency cash socked away is vital if tragedy strikes. Global pandemics, natural disasters, lawsuits, or loss of customers can severely impact your bottom line. Having enough working capital available can help your company weather those hard times without incurring debt.
Expansion and growth—Whether you own a seasoned business ready to expand or a new company looking to grow, working capital is vital to bolstering production.
Seasonal operations—If your company has a seasonal business model, you will likely need extra capital to increase inventory or hire workers. During slow months, working capital is essential to shore up your bottom line.
Short-term liabilities—Paying off inventory, worker salaries, and equipment purchases are crucial to keeping your daily operations running smoothly.

No matter the size of your enterprise, working capital is important and should be evaluated periodically. Working capital that is efficiently managed and maintained at healthy levels ensures your company runs without a hitch.

While you can’t foresee every impediment that comes your way, you can take steps to prepare. If you discover your working capital is lacking after subtracting your current liabilities from your current assets, consider applying for the new Revenued Business Card, which is not a credit card or debit card but could be a great source of working capital for your company.

At Revenued, we understand the importance of having enough money available to keep business operations running steadily while still meeting your obligations. That’s why we came up with the Revenued Business Card.

The Revenued Business Card is an innovative funding solution that provides your company access to the working capital you can use to:

⦁ Pay rent
⦁ Cover payroll
⦁ Fill in monthly or seasonal revenue gaps
⦁ Finance your expansion plans
⦁ Pay for supplies and inventory
⦁ Purchase real estate or vehicles

The flexibility of the Revenued Card allows you to make secure financial transactions anywhere a credit or debit card is accepted. If you encounter a situation where you need cash, you can request a cash draw through your merchant portal.

Call us at (855) 943-5363 or complete our online contact form to learn more.

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