Working capital is generally defined as the money you have available at any given time to meet your short-term obligations and keep your business afloat. Obviously, that makes working capital extremely important to your overall operation, and that means you’ll need to be aware of your current working capital as well as your future needs, and you’ll need to devise a strategy for maintaining adequate working capital at all times.

Calculating Working Capital

The formula used for calculating working capital is very simple and just involves dividing your current assets by your current liabilities. For example, if your current assets totaled $1 million, with current liabilities of $500,000, you would have a working capital of $500,000. You would also have a working capital ratio of 2 to 1, which would be considered extremely healthy for your business. Many small businesses have a much lower working capital ratio and are able to survive on it, so if you have a ratio in the neighborhood of 1.3 or 1.5, chances are you’re doing fairly well.

Importance of Working Capital

Working capital is frequently used to pay project-related expenses and to meet the payroll demands of temporary employees taken on to satisfy those project requirements. Having extra working capital on hand can give you an opportunity to take advantage of supplier discounts because you’ll be able to purchase in volume. Virtually all businesses in existence will undergo periods of time when it’s necessary to have extra working capital on hand.

This extra funding can be used to pay suppliers and employees, as well as meeting monthly expenses while waiting for customers to pay their invoices. Another extremely helpful benefit offered by having extra working capital is that it can help smooth out seasonal slowdowns in business. This is a very typical occurrence for many small businesses, and it’s frequently necessary to manage gaps in incoming revenue while waiting for the business to pick up. Having that extra working capital on hand can literally be the difference between surviving and being forced out of business.

Does Your Small Business Need Working Capital? 

If so, we’d like to hear from you. Contact us at LMC Alternative Business Capital, so we can explore some possibilities with you for funding your small business, and helping you to meet monthly expenses, and to take advantage of business opportunities for growth.