If you’re interested in maximizing your business’ financial reach, perhaps it’s time to look into working capital financing. Working capital refers to a metric that is used as a representation of a business’s liquidity on a day-to-day basis. Before looking into financing, it’s important that companies take the time to calculate their current working capital.
This calculation is a piece of working capital financing which accounts for various current liabilities and assets,
including accounts payable, accounts receivable, cash and inventory. It is used most commonly as a short-term measurement to outline the overall worth of the business, while also helping to maintain a good operations level during a designated period. We have outlined the steps necessary to calculate your working capital:
Step 1 – Figure out the amount of cash that is currently on hand. Businesses can obtain this information through a review of recent bank statements or by utilizing data from general journal accounts, which have recently been closed.
Step 2 – Next, you will need to determine the total amount in accounts receivable. This amount refers to the current asset. Most also consider it a liquid asset. The amount you find should be added to the balance found in the first step.
Step 3 – Take a look at your total inventory and determine the amount. This is an additional current asset used to calculate the working capital. Information regarding your total inventory can be found via income statement balance sheets. Once you have the amount, you can add it to the total found in the second step.
Step 4 – Moving forward, you will need to figure out the total amount in accounts payable. This is a current liability. Once you have this amount, you will need to subtract it from the balance found in the third step.
Step 5 – Finally, you will need to determine the total amount in accrued liabilities. Information regarding this amount can be obtained through a recent income statement. Once you have this total, you will need to subtract it from the balance found in the fourth step.
Using A Financial Statement
If you are using a current financial statement in your calculations, the following steps will help you through the process:
Step 1 – Determine your business’s current assets by checking under the current assets section on the balance sheet. Let’s say that Bob’s company has $75,000 total.
Step 2 – Next, figure out the business’s current liabilities by checking the current liabilities section on the balance sheet. Let’s say that Bob’s company has $50,000 total.
Step 3 – The total amount in current liabilities will now need to be subtracted from the current assets. In Bob’s case, this would mean that $50,000 would be taken from $75,000, with a final amount of $25,000.
Once you have your capital established, you can look into working capital financing options. A quick Google search will likely provide you with a variety of options to choose from. Research these options and make a decision based on your company’s individual needs and goals.
