In simple terms, your company’s working capital is the money you have available for day-to-day operations. Your working capital factors in accounts payable, accounts receivable, cash, inventory and other short-term accounts to measure the liquidity and overall health of your business.
In accounting, working capital is one of the basic indicators of the financial state and operational efficiency of your company. Whether you outsource your financial services or handle accounting in-house, it’s a good idea to understand the importance of working capital and how to calculate it at any given time.
How Is Working Capital Calculated?
If you’re unsure of how to calculate the working capital of your organization, you are not alone. Fortunately, there is a simple working capital formula. To find it, all you need to do is subtract your company’s current liabilities from your current assets.
Here’s a further breakdown to make things even clearer. At a given time, your company’s liabilities might include:
- Accrued expenses
- Long-term debt
- Accounts payable
- Notes payable
On the other hand, your current assets may be:
- Marketable securities
- Accounts receivable
The difference between these totals is equal to your working capital. If you come up with a positive number when you subtract your liabilities from your assets, your working capital is positive.
The reverse is also true. Your working capital is negative if your current liabilities are greater than your current assets.
Now you have an understanding of how your working capital can be calculated. But what does it mean for your business?
Why Working Capital Is Important
Your company’s working capital is an indicator of your overall financial health. If you have positive working capital, your company has the ability to pay off your short-term liabilities at any time. This also suggests that you have sufficient funds to put towards the growth of your business.
If your company has a negative working capital, the opposite is true. You would not be able to pay off your company’s current liabilities immediately if the need should arise.
Negative working capital may indicate to analysts and investors that your company is collecting receivables at a slower rate than is ideal, struggling to grow or maintain sales or becoming overleveraged. Your company may need to take on debt to grow or even to fund day-to-day operations.
While negative working capital may be a cause for concern, your company can continue to operate with negative working capital. Whereas positive working capital is an advantage for your business, negative working capital is an opportunity for improvement.
Good or bad, knowing your working capital is important when it comes to making smart financial decisions.
Contact Marshall Jones Certified Public Accountants and Advisors
Whether your working capital is positive or negative, the right team of financial advisors can help put your company in the best position for growth. For more than 30 years, businesses and individuals in Atlanta have counted on Marshall Jones for outsourced accounting, tax compliance and a variety of financial consulting services. Contact us today to learn more!