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How to Calculate Working Capital and Understanding Why it Is Important in Managing Your Business

Working capital measures a company's ability to meet its short-term financial obligations. It is calculated by subtracting current liabilities from current assets. The resulting figure represents the amount of money that a company has available to fund its day-to-day operations.


The formula for calculating working capital is as follows:

Working Capital = Current Assets - Current Liabilities


Current assets include cash, accounts receivable, inventory, and other assets that can be converted into cash within a year.


Current liabilities include accounts payable, short-term loans, and other obligations that are due within a year.



Here's an example of how to calculate working capital:

Current Assets:

Cash - $10,000

Accounts Receivable - $5,000

Inventory - $7,000

Total Current Assets - $22,000

Current Liabilities:

Accounts Payable - $6,000

Short-Term Loan - $4,000

Total Current Liabilities - $10,000

Working Capital = Current Assets - Current Liabilities

Working Capital = $22,000 - $10,000

Working Capital = $12,000


In this example, the company has a working capital of $12,000.



Why is Working Capital necessary in managing your business?

Working capital is essential for managing a business because it measures a company's liquidity and financial health. A positive working capital indicates that a company has enough funds to cover its short-term obligations and invest in future growth. On the other hand, negative working capital indicates that a company may struggle to meet its short-term obligations and face financial difficulties.


Effective working capital management is crucial for maintaining a healthy cash flow, meeting day-to-day expenses, and investing in growth opportunities. By regularly monitoring and managing their working capital, businesses can improve their financial performance, reduce financial risk, and maximize profitability.

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We recognize the need for customized solutions as each business has differing requirements.

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