Understanding Working Capital
As a business owner, you’re heavily invested in your company. If it does not succeed, you will lose a lot of money, so you want to make sure it’s in good financial standing. One way to do this is to calculate your working capital, or how much money you have available to spend. Subtract your liabilities, such as rent and heating bills, from your assets, such as customer invoices and cash on hand. Once you know how much capital is available, understand its different components and their role in increasing your short-term financial health.
How Do You Decrease Liabilities?
Some liabilities are unavoidable. For example, you can’t skip paying your vendors for the month without experiencing shipping delays and damaging your professional relationships, both of which lose you money in the long run. However, other liabilities are not as permanent as they seem. Talk to your accountants about areas of waste at all levels of your company and find ways to eliminate them. While you need to pay for your office’s heat, you don’t need to leave the thermostat at 80 degrees all day. Additionally, if you have short-term loans, see if you can pay them off early to avoid paying too much interest. It takes creativity to decrease your liabilities, but it’s essential that you do so. If your liabilities continue to grow and your assets stay the same, you’ll have to take out loans, which make it harder than ever to increase your capital.
How Do You Increase Assets?
Once you have your monthly spending under control, look for ways to expand your income so that you have more working capital. Ask regular clients if they’d like to increase their orders. Keep good records of your inventory so that you never order supplies you don’t need. Talk to your employees to see if they have ideas for speeding up sales or production. Avoid selling your accounts receivable unless the alternative is going into debt. That way, your budget does not get off its schedule because of early and reduced payments. These steps are all manageable and while their effects are small on their own, they add up to substantial increases in your assets.
Every month, you have lots of expenses, including payroll, vendors’ bills, and utility payments. If you think that you’re spending too much money, a good way to check your business’s financial health is to analyze your working capital.