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What is Working Capital? How to Use It Effectively

Using Working Capital To Help You Achieve Competitive Advantage

If you are a business owner, working capital is an essential part of your daily operations. As well as supporting running costs and special projects, it’s also there as a safety net for unexpected expenses or sudden investment opportunities. Without good working capital, your business is in a risky position, where even a small wobble in your finances can have disastrous knock-on effects. Working capital is the difference between the current assets of your business (excluding cash) and the current liabilities. It is often an important metric used by financial directors and accountants to indicate the economic health of a business. With good working capital, you’ll be able to buy new materials, equipment and improve the running of your business.

Working capital is a key indicator of a business’s economical health. It is the difference between a company’s current assets and its current liabilities. The idea behind having a good working capital is that it will allow a business to sustain operations if there are payment delays or other financial complications. This can be an important resource for managing invoices, debts, inventory, equipment costs, and payroll.

Working capital represents the assets / resources available to a company for use in day-to-day operations. It is the lifeblood of every business, because that is what enables the business to cover daily expenses and, ultimately, to keep its doors open. With a low level of working capital, a company may not be able to pay its lenders, or there may be a low level of investment in business activities that are likely to lack sales opportunities. Working capital is also a measure of business efficiency and its short-term financial health. Having sound working capital enables the company to generate revenue and increase creditors efficiently, as well as manage inventory and creditors effectively. . How working capital is measured Working capital is calculated as: Short-term assets are all short-term assets that can be expected to be converted into cash within one year. These normally include cash, payables, inventory, prepaid expenses and other liquid assets that can be converted into cash. All current liabilities are short-term liabilities to be paid or expended within twelve months. Current liabilities include trade creditors, taxes payable (income tax, GST, PAYG content), payable age, bank transfers, short-term loans, accrued expenses, and any other amounts that can be repaid within 12 months.