Operating Working Capital Calculation Tips

Any business needs capital to sustain its daily operation. That capital is called the working capital. That figure indicates whether the business has surplus or deficient capital at any given period of time.

Earlier detection of that deficiency could help the business manage its working capital in order to survive.

Working capital plus fixed assets comprise a business’ whole operating capital. They are the fuel that keeps a business running. Fixed assets, which refer to equipment and building, are needed by a business to operate. However, they could not be used to pay suppliers or employees. It is the working capital -- which refers to the business’ cash or liquid assets (assets that can immediately be converted to cash) -- that could be used to pay the immediate expenses of the business like rent and utilities. Without it, a business would be unable to finance its day to day functioning and would soon have to stop operating. It is therefore necessary that you know how to calculate your working capital. In general, the formula for calculating working capital is

Working Capital = Current Assets – Current Liabilities

Current Assets and Current Liabilities Defined

But what are current assets? Current assets refer to cash and liquid assets like marketable securities and receivables. The term “current” means the marketable securities may be converted to cash within one operating cycle (usually within one year) and the receivables are due to be received within the same period of time. Current liabilities, on the other hand, are debts due to be paid...you guess it..within one operating cycle (usually within a year).

Tips in Calculating Working Capital

When calculating for working capital, it is best to gather first all the items under current assets. Include cash, cash equivalents, deferred tax assets and deposit balances (cash at bank), inventory, and marketable securities. You can get that information from the balance sheet. All the items under current assets should then be totalled.

Then, current liabilities items should be gathered next from the income statement. Include accounts payable and notes payable that are due within the fiscal year. The sum of this should be totalled. Afterwards, you subtract the current liabilities from the current assets. There are online calculators like that of Dinkytown(http://www.dinkytown.net/) that could do calculations like this.

The difference when current liabilities are subtracted from current assets refers to the amount available to fund the daily operation of the business. If the figure is positive, it means the business is healthy or has the capacity to spend for the cost of doing business as well as pay debts that come due within the year. If it is negative, it means the business lacks the necessary capital to operate in the coming months. It further means that a better working capital management should be put in place for the business. Or the business must change the way it spends cash, buy inventories, collect receivables and pay payables.


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