It’s essential for entrepreneurs to thoroughly understand working capital. Although it may sound vaguely familiar, getting a firm grasp on the importance of working capital is key to helping your business succeed.
Keep reading to learn what exactly working capital is and to ensure your company’s working capital is up to par.
What Is Working Capital?
Working capital is a measure of the difference between a business’s current assets and current liabilities. Sometimes referred to as net working capital (NWC), working capital tells you what your business owns minus what your business owes. It is an essential tool to measure your company’s operational efficiency and financial health.
- Current assets refer to what your company owns that can be turned into cash. Current assets include checking & savings accounts, mutual funds, stocks & bonds, inventory, and accounts receivable.
- Current liabilities, or what your company owes, include accounts payable, income taxes, rent, utilities, and salaries. They are the expenses or debts incurred by your company in the past year.
How to Improve Working Capital
Improving your working capital is key to ensure your daily operations are running smoothly, and can even help you in areas such as applying for a performance bond. Below are some tips for increasing your working capital.
- Pay debts on time. Avoid paying penalties by ensuring your debt obligations are paid on time.
- Improve accounts receivable. Offer incentives to customers for timely payments.
- Avoid stockpiling. When you have excess inventory, more of your capital is tied up in unused assets.
- Cut extraneous costs. Audit your company’s expenses and determine if there are areas that you can cut for the time being to maintain company functionality.
While you can’t prepare for every situation, understanding your business’ working capital can help ensure you are at sufficient levels in case of financial difficulties. Check out this article for more information on everything you need to know about working capital by JW Surety Bonds for an in-depth guide to understanding your company’s working capital.