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When it comes to business success and financial health, money is a top priority. This is as true for startups looking to scale as it is for established companies looking to stay afloat. One important form of money for business owners is called working capital.
Working capital can be used to purchase equipment, pay bills, handle payroll, develop new products or services and so much more. It can also provide a financial picture for where a company is earning and investing its money.
In simple terms, every business needs working capital to reach its goals. From networking capital, to short term, the importance of working capital cannot be overstated.
What is working capital, and what is the importance of working capital?
Working capital is more than just “money.” It is an important financial metric that identifies the current operational efficiency, liquidity and short-term financial health of a business.
Working capital is the difference leftover when a company subtracts all its liabilities from all of its assets. For example, if a company has $800,000 in assets and $600,000 in liabilities, its working capital is $200,000. In order to get a clear picture of a company’s working capital, you need to understand the assets and liabilities that go into the equation, also known as the components of working capital.
What are the four main components of working capital?
Cash and Cash Equivalents
It is important to take stock of your immediate (or nearly immediate) liquidity because ultimately cash reserves can get a business through emergencies and make instant purchases like equipment upgrades.
Accounts Receivable (AR)
One of the main reasons it is important to understand your accounts receivable is because unlike current cash on hand, AR tells the story of what you have sold lately and what money you can count on to be coming in within the next month or so.
Inventory
Understanding your inventory is important for a couple of reasons. First, because inventory is liquid, it’s a key aspect in determining your overall current liquidity. Second, you may also get a better understanding of whether you need to spend more or less on inventory for where your business is currently at.
Accounts Payable (AP)
Knowing the landscape of your accounts payable is important because it encompasses an entire half of the working capital equation. Understanding your accounts payable also helps you understand how much money you will be spending, when and if you have the capability to handle it all.
Once you have calculated all of these components, you can easily figure out your working capital. It is important to know how much working capital you have for a few reasons. For starters, understanding your working capital also means you understand the financial state of your business. Additionally, working capital is also a large determinant of whether your business can grow or if an injection of funding will be required to take the next step as a company.
Sources of Working Capital
Now that it is clear how important working capital is, it’s time to figure out where it comes from and how to make sure your company has enough. There are multiple ways to procure funds, but some of the most common ones include:
- issuing shares
- getting a loan from a financial institution
- retaining earnings
- selling capital assets
- securing a line of credit
With many of these (and other) common forms of financing, it takes a while to actually be able to see and use the money. Between legal proceedings and other processes, it can be days, weeks or even months before the funding is actually available to help your business. A lot of times, when businesses need to borrow money, they need it as soon as possible. That’s where Backd enters the equation.
Secure Fast Funding with Backd
Backd understands the role small to medium businesses play in the economy. Unfortunately, securing business financing is often an arduous process. Backd provides a fast and easy experience for every entrepreneur to get the funding they need, when they need it. Backd offers competitive rates, same-day decisions, quick applications and flexible terms. Apply now.
