Working Capital = Current Assets–Current Liabilities
Just like the human body needs calories to survive, a business needs working capital to continue operations. Working capital is the money that is on hand for normal business operations.
If you have a solid business plan, and business is going well, then you should generally have enough income on hand to cover all your operating expenses. When ends don’t meet, your business has to look for other sources of cash (that’s when you come to us!). Ideally, however, your business will provide enough income so that there is working capital and enough left over for PROFITS. That’s a great word, isn’t it?
Here are three things to remember when looking at your working capital and cash flow.
- Project revenues honestly and realistically.
- Don’t forget to include EVERYTHING in your estimate of costs. Labor, supplies, rent, utilities, storage, salaries, and professional services/consultants are just SOME of what you need to remember.
- Break down and make a time estimate for your business cycles. Working capital means that it is there when you need it, make sure you will have money to cover expenses during the slow periods of your business. Your cash flow needs to make sense.
- Make a list of plausible future changes that could affect your business. This could include anything from competition to a change overhead, or payment terms on either the Receivables or Payable sides.