What is working capital?
If you ask your accountant, they will probably describe it in a simple equation: working capital is current assets minus current liabilities. Working capital is quite straightforward, once you understand what it’s all about.
In its simplest form, working capital is what’s left after you’ve tallied up your short term assets and subtracted your short term debts. What have you got left? That’s your working capital. It’s the money that is available to pay for immediate expenses, should you need it.
These expenses could include:
- Any wages you need to pay employees for additional hours;
- Repairs to any equipment, such as fixing a broken fridge;
- Purchasing more supplies when stocks are low; and
- Unexpected purchases you may need to make.
At a high level, working capital is an indicator of how efficiently a business is operating. It’s a measure of short-term health. By looking at current assets and liabilities, you can gauge whether a business is being managed effectively.
What does this mean day-to-day?
Ultimately, working capital comes down to whether you’d be prepared if you came up against a roadblock tomorrow. Working capital is vital because your business may not be able to run if your kitchen equipment is out-of-order, the truck breaks down, or a growth opportunity comes your way and you can’t take advantage of it. It’s virtually impossible to predict these occurrences every time, so having money in the bank as a buffer is essential.
Things to keep in mind
It may sound counterintuitive to everything we’ve just spoken about, but having too much working capital isn’t always a good thing.
If you have too much money tied up in working capital, you may be missing out on using the money for other things. For instance, perhaps the excess money would be better invested in a refurbishment, redecoration or hiring a new employee, rather than just sitting in the account.
Balance is key, so have a chat with your accountant about the amount of working capital that is healthy in your industry and for your specific business. Don’t leave these key decisions to chance!
Nicki is our Senior Working Capital Manager. She works with a team of talented product specialists, leveraging 25 years combined experience to help Aussie businesses find tailored finance solutions.
Related Posts
Does working remotely work? The stats are in! Here’s how our idea of work-life balance has changed, and whether it will stick.
Finances hit hard by Covid? Click to learn more about hitting pause on your mortgage repayments, and other ways to relieve financial pressure.
Who saw 2020 turning out like this? No one. But that can only damper our spirits for so long.
COVID forcing you to rethink your business model? Here are five practical steps you can take to cope with new challenges and changing needs.
While no one planned for COVID-19, there’s a plan in place to keep SMEs afloat. Here's what you need to know.
A minor setback can be challenging, but there's no reason to let it derail your business goals. Here are a couple of coping strategies to keep you moving.
Put your best foot forward by preparing strong answers to these 4 questions.
A little preparation goes a long way. Get ahead on the finance front with our quick tips to help you with the 3 key areas of your loan application.
Cut through the confusion. There's so much talk around credit scores and what they mean; it can be hard to seperate fact from fiction.
The time arrives in most small businesses when you’re required to borrow money. So, how do you get 'business finance ready'?
We sat down with Neil Slonim, The Bank Doctor, to find out what he thinks about Australia's fast-growing online SME lending market.
Finding the right business loan doesn’t have to be difficult. See how we helped Mark’s Wholesale Steel Business find the right business loan for them.
How do you attract new customers to your business? Where do loyal customers come from? It all starts with your SMB online strategy.
The path from personal trainer to business owner can be both challenging and rewarding. Check out our top tips for making the transition.
Want to reach your customers online? Are you ready to digitise your small business? First up: get smart about social.
Don't let angry customers stay angry. Protect your business' reputation with these simple tips and tricks for delivering exemplary customer service.
Every business is unique. Every business loan is different. What features are most important to you? Consider these 4 things before applying for finance.
Have you explored your trade finance options? Premiering your business on the world stage may be within reach.
Your guide to smart inventory management for every season.
Get more customers and keep them. Here's the low-down on setting up your very own customer loyalty program.
You've explored your business finance options. What do you do next? How can you be sure you're comparing loans effectively and getting the best deal?
Want to expand your team but don't know where to start? Here's our guide to hiring great employees, featuring tips from industry leaders.
A Unique Selling Proposition (USP) is fundamental for any business looking to grow. Learn how to develop your USP and stand out from the crowd.
Are you invoicing your B2B customers with longer payment terms? Is it hurting your cash flow? Debtor finance could be a lifesaver between payments.
With so many business finance options to choose from, how do you know whether working capital is right for your business? Start by reading this.
Are you ready to refinance? Reviewing your business loan every 2 - 3 years can save your SME a lot of money. Here's what you need to know.
2018 is your year. Here are 7 quick tips and tricks to get back in the driver's seat when it comes to battling business debt.
Improve your chances of locking down the perfect business loan. Here are 19 business funding mistakes to avoid when you're applying for commercial finance.
Setting up a business is hard enough, without getting stung with unexpected costs. Here are the things you should be thinking about before you dive in.
Getting the best rate is all about asking the right questions. Have you done your research? Here's where to start and why.
"Ok, I'm eligible for the R&D tax incentive. But how do I actually claim it?" Here's what you need to know.
You could be missing out on a tax offset of 45 cents in every dollar. Check your eligibility for the R&D tax incentive today.
Need to raise cash for your business? We explore the use of debt versus equity, and how to decide which one is best for your business.
Reward points can add value to your business, but it's not one-size-fits all. Here's what you need to know.
Here's the million dollar question: will you start up a company or will you establish yourself as a sole trader? Get the full story.
Valiant Finance is a small business dedicated to supercharging the growth of other small businesses through access to funding. Here's what we've learned.