Working Capital Calculator
Managing business finances can be tough. Read on to understand why working capital is so essential to your business, and use this working capital calculator to get a handle on your finances.
“Working capital” may sound like a high finance term, but it’s very much an everyday part of your small business. It’s a measure of your financial health and a critical tool for making business decisions and getting approved for loans and other financing. Working capital is essential to running your business. This calculator will help you determine your working capital needs for the next year.
What Is Working Capital?
What does the term “working capital” mean? The basic definition of working capital is “the amount by which current assets exceed current liabilities.” In simple terms, working capital is the amount of money that a small business needs to have available in order to run their daily business operations – that means paying the bills, the debts, and the employees. Adequate working capital is a strong indicator of a small businesses’ future financial viability.
Working capital is needed to help a business expand and grow when times are good and cover “rainy day” needs, plus that working capital keeps the lights on when times are rough. The vast majority of new small businesses don’t have enough reserve cash in the bank to cover unexpected large business expenses, seasonal fluctuations, emergencies, or extreme dry retail spells. In some cases, they don’t even have enough to pay the basic bills.
That is why it is important to know how much working capital your small business needs before you have a financial crisis that requires you to tap into that money. If you plan ahead to have enough working capital as a safety net, then your business can sustain itself during periods of decreased revenue or slow sales and take advantage of growth opportunities when they arise.
How Does Working Capital Factor Into Lending Decisions?
Working capital is not only important when it comes to keeping your business afloat, it can also be important when it comes to securing a loan for expansion in the future. Prospective lenders and creditors will look at your small business working capital to determine whether your company is a good credit risk and whether your business has the ability to manage any new debt.
Lenders want to make sure that you’re going to have enough cash to cover the debt, plus a comfortable cushion. They also like to see that you’ve been taking good care of your business and that it’s already financially healthy.
How Can You Calculate Your Small Business Working Capital?
Of course, you don’t have a bank account labeled “Working Capital.” So how do you figure that number out?
In order to calculate your business working capital, just subtract the total of all your current business liabilities from the total of all your current business assets. The math problem would read Business Assets – Business Liabilities = Working Capital.
Now, that’s the working capital you have. The working capital you need is a different question, and depends a lot on your particular business. In many cases, you’ll want to save up several months’ worth of cash to make sure you don’t get caught in an emergency. Talk to your financial advisor about the right level of working capital for your business.
Note that working capital is not a static number. During the lifespan of your small business, your working capital needs can and will fluctuate. If you work with a high volume of seasonal merchandise or account receivables, then you may face challenges maintaining a stable working capital number during those peaks and valleys. Keeping track of your working capital is a good way to help smooth out your financials and make sure you’re putting away enough cash during the peaks to bridge the valleys.
Online calculators can help you determine the exact amount of working capital your own business may need. Visit the interactive resource Working Capital Needs Calculator – The Hartford to assess your individual small business working capital needs.
Make Working Capital Work for You
Maintaining a sufficient amount of working capital can help your small business stay afloat during lean times and grow during prosperous times. Adequate working capital can also help your small business secure loans and build credit. Calculate your own small business working capital needs with online resources and you’ll be better prepared to ensure the financial health of your business in the future.