Working Capital

Owning and operating a business is expensive. Do you know how much financial cushion you have on a month-to-month basis?

The working capital formula lets you know how much money you have after you’ve finished paying off your current financial obligations. You don’t want to be in a position where you are unable to pay your creditors, so it’s a good idea to watch this metric.

At GEPC, we can help you understand the role that working capital has in your business. It’s time to take charge of your finances.

What is it?

The working capital formula tells a business how much of their current assets are available after current liabilities have been taken into account. Current assets refer to items like cash, accounts receivable, and inventory, etc. In other words, they are either cash or items that can be quickly converted to cash. Current liabilities refer to payments that are due within the year (including accounts payable, accrued expenses, and short-term loans). 

Like the Quick ratio, the amount of working capital a business has is a good measure of short-term liquidity and short-term financial health. The more working capital the better, as it represents the amount of money the business can work with.

How will it impact your business?

A positive working capital balance is desirable since it means the business is able to pay off short-term obligations and still have some financial cushion. A business with more working capital will be able to focus on activities that facilitate growth, rather than simply paying off financial obligations. That being said, some industries don’t need very much working capital due to the nature of the business (i.e. companies that can generate cash very quickly due to high inventory turnover and have speedy collection of payment, such as Walmart). 

If the amount is undesirable (negative), for most industries this indicates issues with cashflow that will need to be addressed. It may require the business to acquire funding from creditors in order to pay off their financial obligations.

ready to Take Action?

Working capital can be increased through increasing assets, reducing liabilities, or adjusting cashflow.

Want More Information? 

Schedule a free consultation at gregevans.ca or (705) 880-2224 to learn more about what we have to offer. It all starts with a conversation.