What is Business Working Capital?
Business working capital is the liquidity available for the day-to-day operations of a business. It is a measure of both a company's operating efficiency and its short-term financial health.
- Current assets are assets that can be quickly converted into cash (e.g. accounts receivable, inventory and bank accounts)
- Current liabilities are financial obligations due within one year (e.g. accounts payable, line of credit, accrued expenses)
Business working capital is a sign of a business’s operating liquidity which can be positive or negative at any given time. Positive working capital signals a company's ability to meet its short-term debt obligations and, most importantly, to remain financially viable.
Do You Have Enough Working Capital for Your Business?
The adequacy of your business working capital depends on several factors, including the industry you operate in and your relationship with customers and suppliers. For example, if your industry requires you to hold a large amount of inventory, your need for working capital is higher. However, if your vendors provide you with longer payment terms, your need for working capital is lower. Depending upon how fast or slow your customers pay you, your working capital needs can change.
Why is Working Capital Important?
Well managed working capital is critical for running a healthy and successful business. If your current assets do not exceed your current liabilities, you run the risk of being unable to pay short term creditors in a timely fashion. The key is to manage cash, inventories, accounts receivables and accounts payable at levels appropriate for your business. This involves striking a good balance between growing the business and profitability while maintaining adequate liquidity.
Businesses that are seasonal or cyclical often require more working capital to stay afloat during their off-season. Although a company may make more than enough to pay all its yearly obligations, it must ensure it also has enough working capital at any one time to meet short-term obligations. For example, a company may conduct much of its business over the holidays. However, the company must have enough working capital to buy inventory and cover payroll during the off-season as well, when its revenues are lower.
Did You Know…
The term “working capital” is used to address money required to fund a business’s short term assets. The two primary short-term assets of all businesses are inventory and accounts receivable. If a business needs money to hire employees or fund marketing, then “capital” is needed, not “working capital.”
Does Your Business Need Working Capital?
If your business needs working capital to grow, Excelsior Growth Fund can help. Learn more about how our small business loans can help you buy inventory, pay vendors and more.
About Excelsior Growth Fund
Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more atwww.excelsiorgrowthfund.org.