Working Capital: What to Know

Working capital is a crucial aspect of any business, large or small. It's the lifeblood of a company, providing the funds necessary to keep the operation running. But what exactly is working capital, and how can a business make sure it has enough of it?

Working capital is composed of two primary elements: current assets and current liabilities. Current assets are those that can be converted into cash within a year, such as cash on hand, accounts receivable, and inventory. Current liabilities are those that must be paid within a year, such as short-term loans and accounts payable. The working capital equation calculates the difference between these two figures: Working Capital = Current Assets - Current Liabilities.‍

Ideally, a business wants to have a positive working capital balance. This means that its current assets exceed its current liabilities, indicating that the company has more money available to cover its short-term costs. A negative balance means the company is in danger of not being able to meet its short-term obligations.

Working capital is important because it provides a cushion for businesses when they experience short-term liquidity problems. It also enables companies to take advantage of opportunities as they arise. For example, if a company has excess working capital, it can use it to finance the purchase of new equipment or to expand its operations.

There are several factors that can impact a company's working capital position. The most obvious one is sales: if revenue goes down, then so does the ability to cover current liabilities. Another key factor is how quickly current assets turn into cash. For example, accounts receivable may be due within 30 days, but if they're only collected at a rate of 10 per day, then the company has only three days' worth of liquidity.

There are several ways for businesses to improve their working capital position. One is to increase sales volume; another is to speed up collections from customers; and yet another is to reduce costs by paying suppliers more quickly. Finally, businesses can also seek out financing options such as term loans or lines of credit to provide additional liquidity.

At Driven, helping small businesses to reach their full potential is fundamental to who we are. We want to approach things differently, bringing you closer to your business growth goals without the hassle of jumping through multiple hoops to receive funding.

We recognize that seeking small business funding can be frustrating and discouraging for many established start-ups or small businesses who struggle to meet the tight criteria of larger banks or lenders. That’s why our digital-first approach allows entrepreneurs to quickly and easily apply and access the funding they seek. If you are interested in working capital for your business, we encourage you to apply with Driven. 

Working capital is essential for any business to thrive and grow. By understanding what it is and how to improve its position, companies can ensure that they have the resources they need to prosper.

It's important for businesses to maintain healthy levels of working capital in order to stay afloat and grow their operations. It’s a critical component of any business' financial health and should be actively managed to ensure its ongoing success.

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