When it comes to paying your employees and operating your business, capital comes into play. Your business needs to run efficiently and handle the incoming costs that come with operating a business. Keeping an eye on your company’s future goals and needs requires understanding your funds and cash flow. If you want to make operating your business at a level that facilitates growth, then you need to keep an eye on your business assets, liabilities, and daily operating costs.
The Formula
Understanding working capital comes down to a simple formula.
- You take your company’s current assets minus your business’s liabilities. What you have leftover is your working capital.
Why is this formula important for every business owner? This allows you to perform financial analysis, manage cash flow, utilize financial modeling and determine the company’s immediate liquid assets.
The Process
If you’re looking to increase working capital, you can do so in a number of ways. Selling additional services and products will up your business sales. You can also cut spending and limit costs to ensure additional monies are available. Leasing equipment or outsourcing job duties for a lower cost can all play a role in increasing your daily capital.
The Measure
You can measure a company’s competitive edge by comparing the business assets to a competitor company, determining which business has the better competitive edge. This will help you gain an understanding of where you stand in the market and what might need improvement.
Keeping costs low and being able to operate your business without being in a deficit, is key to having funds work for your company’s financial health. When a company is in constant deficit, they run the risk of not being able to pay for daily operations. This can lead down a path of needing additional funding. If a business can’t determine how to raise money to cover the expenses, then this can start a cycle of obtaining too much debt without enough profit to offset the liabilities.
The financial health of your business is determined by your working capital. If you have a good understanding of the formula and what your business looks like after liabilities, then you’ll have a strong foothold in keeping track of your finances. Making adjustments to your business can boost your company’s financial state. Cutting overhead costs, outsourcing job duties, or making more sales are all areas that give your company a chance to improve. Knowing how to make your funds work for you will allow you to make the best decision for your company’s future.
