As a small business owner, your working capital is one of the most important elements on your balance sheet. It’s how investors determine your financial stability, and it shows how much money you have on hand to manage business operating costs and grow your assets. Working capital is defined as your current assets minus your current liabilities.
Here are two ways to use working capital to manage your business operating costs and improve growth:
1. Accounts receivable: If your business relies heavily on inventory to run daily operations, you need to keep your shelves stocked. But, if your customers don’t pay in full up front, you may not obtain your accounts receivable until the end of the month. If you have business operating costs you need to meet before that time, working capital can provide you with the extra cash to purchase that inventory.
2. Accounts payable: If you have outstanding short-term debts to suppliers, they may offer you discounts for paying your bills ahead of schedule. You can use working capital to pay down this debt and earn the early payment discount.
Determine working capital needs with helpful calculators
If working capital dips too low, it can hurt the growth of your business. One way to supplement working capital is with a small business loan or business line of credit. These can provide you with the short-term funds you need to grow your assets. But, how do you know how much you need to borrow? A working capital calculator and business loan calculator can help you determine this and give you insight into your chances of being approved.
To use these calculators, input your annual growth, total current assets and liabilities, and target current ratio to determine how much of a line of credit you need to reach the next level. The lower your rate of inventory turnover, the higher your working capital should be.
How your current ratio affects working capital
Your current ratio is found by dividing your assets by your liabilities. Examine your current ratio to get a sense of your financial state and your goal financial state. It determines how many dollars in your assets are likely to convert to cash within the year in order to help you repay current debts. If you have a ratio of 1, you’ll want to boost your working capital as soon as possible, aiming to get your ratio to 1.5 or higher. A small business loan or business line of credit can help you get there. In the meantime, minimize new investments in land or equipment, and choose to save money with liquid investments like money market accounts.
Cover business operating costs with working capital
Working capital helps you grow your assets and, in turn, grow your business. Once you know how much working capital you need for your desired growth, speak to your lender to find out which borrowing option best meets your needs. Small business loans and lines of credit can give you the temporary boost you need to grow your assets.
Sponsored content was created and provided by RBS Citizens Financial Group.