What’s working capital?
Generally, working capital or current capital is crucial to maintain the business liabilities sleekly and firmly. Business liabilities refers to daily expenses & operations.
Working Capital Formula: Business Assets – Business Liabilities or Expenses.
Here, business assets imply mandatory prepaid expenses, inventories, receivables, and others which can get easily turned into cash. Besides, business liabilities must get paid off within one year of the business cycle. The business liabilities include accounts payable, accrued income taxes, accrued liabilities, and dividends payable.
Then what’s net working capital?
It means the business’ current worth to fulfil the current expenses of the business. A company is said to have a positive networking capital if it meets the costs or business liabilities with sufficient funds.
How to do Working Capital Management as a small business?
Any size of the business should maintain working capital to handle internal and external operational efficiency.
The primary components of Working Capital Management include:
1. Inventory Management:
The raw materials, finished goods, WIP products and others that are either manufactured or purchased from several suppliers come under inventory. A company must plan inventories as per budgets and sales.
2. Accounts Receivable:
The amount that is on credit from buyers to the seller while doing business comes under Accounts Receivable. This payment needs to be received by the sellers within a stipulated time-period given for completing the payment. Financio’s accounting automation can assist in handling the accounts receivable with more efficiency and accuracy within time. Doing so can generate the in-flow of cash for the business.
3. Accounts Payable:
The short-term debts that are payable within a certain period of time comes under Accounts Payable. This money gets treated as a current liability as the business pays back to the supplier for the goods purchased or services consumed. A business owner can pay the supplier on time with Financio’s accounting automation.
4. Cash Management:
Cash and the Cash equivalents need effective management with well-planned operational costs and other accidental expense. The flow of cash decides the financial stability of a company.
The adequate inflow of cash and its availability can generate and aid to take up new opportunities to expand and explore in the world of business. However, only a few businesses have adequate funds to carry out the business operations smoothly. In this process, most of the companies seek business loans.
So, plan your working capital for the first few years or else get funding from sources like:
- Equity financing: If the business is not profitable in the first year, then raise the equity funds to meet the short-term needs through working capital.
- Get a business loan: Fulfil business needs with temporary working capital obtained through short-term business loans.
- Implement Key Performance Indicators (KPI): To succeed in business, a company should have KPIs on working capital.
- Control internal & external expenses: In a startup venture, it’s not so tempting to ignore any costs. Set specific rules and guidelines for any costs.
- Stay in touch with alternative lenders: It’s always suggestible to stay connected with a lender for emergency loans, invoice factoring and discounting as well as for asset-based finance.
Working Capital is the key to any size of business. Accounting automation platform of Financio can assist any size of business with secured and efficient service. This service is a must for every cautious business owner and a well-organized company. So, plan and use working capital with advanced brilliance of accounting automation.
Financio cloud-based accounting software – much needed to roll with the cash flow anywhere at any time!