Working capital is the difference between current assets and current liabilities. It is the amount that is available to meet your small business’s short-term obligations, such as debt due within a year. Working capital management is a particularly pertinent issue if you have launched a new enterprise or are running a small business. While an established business or a large business may have alternative access to short-term financing, your small business may not have this flexibility. You need to have enough liquidity to run your business without any issues. Common current assets are inventory and supplies. When you purchase from vendors, you can either pay cash upfront or at a later time. The latter creates a payable. Accounts receivable arise when you sell your goods or services and extend credit to the customer. However, without proper working capital management, these receivables can linger and create a cash crunch. There are various measures you can use to gauge the effectiveness of your working capital management, such as days of sales outstanding, days of payables outstanding, and inventory turnover. Liquidity is key for your small business. Tying up too much cash by purchasing a large amount of inventory or slow collections can be very detrimental to your firm’s fortunes. Efficiently managing your working capital can free up your cash to conserve for a rainy day or invest in projects.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.