Net working capital is the amount of available cash or liquid money a business has to run its day-to-day operations. Establishing your working capital will help you plan how to meet your recurring and short-term financial obligations. This requires following a relatively simple formula: Subtracting Current Liabilities from Your Current Assets.
Generally, it will involve precise book-keeping to determine the amount of money you have against the costs your practice’s operations incur. Here is how mastering this process will benefit your business in the short and long run.
Understanding The Financial Needs Of Your Business
It is almost impossible to accurately predict the real financial needs of your business until you have measured your working capital against your financial obligations. Costs can fluctuate with time and elements outside of your control, such as changes in your product sourcing process, supply shortages, labor strikes, or even a pandemic.
Staying on top of your working capital figures will let you know when and if you need help or when some money can be saved to re-invest in the business.
Optimizing Your Working Capital
To run a successful business, you will want to maximize your net working capital, but ensure it doesn’t surpass a point where too much liquidity eats at your long-term bottom line.
Knowing your net capital will help you devise a strategy to lower your costs, for instance, by negotiating better payment terms with vendors or suppliers. It will also highlight the payables that have not been paid on time and allow you to set a receivable collection tactic.
Paying Off Short-Term Loans
The more net working capital you have and the more organized you are about spending it, the greater the room you will have to handle long-term liabilities, contract new loans, and negotiate better credit terms. Investors are often drawn to high working capital, particularly if the latter is used to quickly eliminate loans that can compound with time.
If your working capital is particularly high one specific month, consider paying off a business credit card debt or handling months/weeks of rent in advance.
Are you looking for financing help that caters specifically to your industry? Eagle Bend Capital Financing has teams of financial experts with expertise spanning all commercial industries. Contact us today for guidance on how to take your business to the next revenue level.
