What is Working Capital?
Many entrepreneurs seek loans to secure working capital for their small business. SmartBiz SBA loan proceeds are often used for working capital to help a small enterprise grow and flourish. Do you know what working capital is and how it can help your small business?
Working capital is defined as the difference between current assets and current liabilities. According to the Small Business Administration’s website, current assets are the most liquid of your assets. If you have money in a company checking or savings account, the cash is considered liquid because it can be withdrawn easily to settle liabilities. Investopedia lists examples of cash and cash equivalents. In addition to bank accounts, marketable securities and Treasury bills are also considered liquid. An example of a non-liquid asset is a real estate investment because it can take months to receive cash from the sale. For example, a company might own real estate and decides to liquidate that asset to pay off a debt a month or less. It might take more than one month to sell the property and a quick sale could result in a financial loss. Current liabilities are any obligations due within one year. Working capital measures what is leftover once you subtract your current liabilities from your current assets. This can be a positive or negative number. Working capital represents the cushion of protection you can give your short-term creditors.
It’s critical to have positive working capital so that your small business can meet operational needs. These needs might include making payments on existing debt, meeting payroll obligations or other important factors that keep a company running. If current assets aren’t more than your current liabilities, you could find yourself in financial trouble and unable to pay short term creditors on time.
Businesses that are seasonal can require more working capital to keep running during the off-season. Although your company may make plenty to pay all yearly obligations, small business owners need enough working capital at any one time to meet short-term obligations. For example, a company may do most of their business during the holiday season and be flush with cash in December. However, the company needs enough working capital to buy inventory and cover payroll during the off-season when profits are lower.
Working capital can be used in a variety of ways. Examples include purchasing inventory, launching marketing initiatives, hiring employees, paying taxes and unexpected expenses.
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