- June 11, 2019
- Posted by: mcg_admin
- Category: Uncategorized
Working capital is essential for day-to-day business operations at any business. So, in this article, we’ll discuss the basic steps you need to take to calculate working capital at your business. Take a look now and see how you can quickly and easily calculate your working capital.
Begin by Assessing Your Current Assets
Usually, you will calculate working capital by first looking at your current assets. This includes all of the property, both intangible and tangible, which you can easily turn into cash within a single year, or one business cycle, whichever is shorter.
Most obviously, this includes:
- Cash held in checking and savings accounts
- Stocks, bonds, ETFs, mutual funds
- Money market accounts
- Cash and cash equivalents
- Inventory and stock
- Accounts receivable
- Paid-off assets (vehicles, construction equipment, electronics, etc.)
Usually, this does not include real estate, as it is difficult to sell commercial real estate quickly, and if you own the building from which you operate, you will no longer be able to operate your business from it if you sell it.
Calculate Your Total Outstanding Liabilities
Next, you need to calculate all of your outstanding liabilities – all of the debts and expenses that you expect to pay during the current year or business cycle, whichever is shorter. This list of expenses can include:
- Rent and utilities
- Materials and supplies
- All payments on debts and loans
- Accounts payable to vendors
- All accrued liabilities and income taxes
- Payroll costs
- Dividends payable
- Capital leases or long-term debt that is due within the year/business cycle
Take the time to think through all of the expenses you pay for within a year. If you have had your business for a long period of time, you can use your expenses from the previous year as a guide. You may need to do some estimating, particularly if your business is growing – that’s perfectly acceptable as long as it’s an informed estimate.
Divide Assets by Liabilities to Find The “Current Ratio”
The “current ratio” is often used as a metric of a company’s overall financial health. You get this measurement a company’s short-term assets by its short-term liabilities. Let’s say your company has short-term assets of $10 million and short-term liabilities of $7.5 million.
$10 million ÷ 7.5 million = 1.25, so your company will have a current ratio of 1.25, which is great! The higher a company’s current ratio is, the more easily it will be able to pay off all of its short-term debts and fund its day-to-day operations.
On the other hand, a current ratio of less than 1 indicates that a company may be struggling to get more cash flow and repay what it owes. If you have a current ratio of less than 1, this is also known as negative working capital, because you currently owe more in short-term liabilities than you have in assets.
Follow This Guide to Calculate Working Capital!
If you’ve been wondering how to calculate working capital, we hope this guide has been helpful. It’s not a difficult metric to calculate, and it can give you some insights on your overall business health. So, follow this guide, calculate your own working capital now, and see how healthy your corporate finances really are!