Working Capital
Working Capital is the money that a business has available to manage its immediate operations. By subtracting current liabilities from current assets it can be estimated, and it is often used for paying employee wages, buying inventory, and keeping up with other operational expenses.
A Scenario : Understanding Working Capital
Sarah, a small business owner, has been running her retail store for 5 years and has had consistent sales & a faithful customer base. Yet, she is struggling to keep cash flow positive & the store afloat. She has used up her own money for funding the business but is now facing financial difficulties because of it.
After much deliberation, Sarah opted to take the help of a business expert to provide her with financial guidance. At their meet, this consultant highlighted the idea of working capital for Sarah.
He outlines how working capital is the variation between a company’s current assets and liabilities and serves as an indication of its financial wellbeing.
Sarah’s business underwent a working capital analysis and it was revealed that she had negative working capital. This means that her liabilities exceeded her assets and consequently, she was unable to clear her short-term obligations.
To tackle the problem, the consultant suggests that Sarah improves her accounts receivable management and decreases her accounts payable. Additionally, she recommends Sarah consider obtaining a short-term loan to bolster her working capital and improve her cash flow.
After carefully considering the consultant’s advice, Sarah decides to put it into action. She implements a rigorous accounts receivable collection policy, negotiates advantageous payment terms with vendors, and obtains a short-term loan. Through her hard work & dedication, her working capital gradually grows and she stabilizes her cash flow situation.
In this scenario, optimizing Sarah’s working capital was paramount to the success of her business. With a better understanding and proper management of her working capital, Sarah was able to bolster her cash flow and ensure that her business stays financially healthy in the long run.
