6 Reasons Working Capital is the Blood and Nerve Center of a Business
Adulting

6 Reasons Working Capital is the Blood and Nerve Center of a Business

Why working Capital is most Important Aspect of Every Business?

433

Working capital is simply the amount of money that a business has to operate with. It is the current assets minus the current liabilities. Current assets include cash on hand, inventory and accounts receivable. Liabilities include accounts and notes payable, expenses, and current loan/debt payments.

Working capital represents the liquidity of a company, a measure of its value, efficiency or stability (depending on how you want to look at it).

Working capital is important primarily because it is the money that keeps a business running. With little working capital, a company won’t . . . work. Here are some of the ways that working capital is the lifeblood of a business.

1. Strengthening Solvency

Solvency is the measure of how much greater your assets are than your liabilities; it tells you how easily you can pay off your debts. Having sufficient working capital is the first and best way to pay off short-term liabilities. When you are able to easily pay salaries, equipment rentals, and other immediate costs, then your company can run more smoothly.

2. Moving Forward

One of the most effective ways to propel your business forward is with the use of working capital. When you have the right amount of disposable working capital, you can easily pay off any debts or costs and focus on investing for future expansion. Negative working capital (i.e. a situation where your liabilities are greater than your assets) means that you do not have the capacity to expand.

3. Developing Relationships

When a business is able to make all its necessary payments in a timely manner, it breeds trust and goodwill among its employees, with its vendors and other external agents. With sufficient working capital, a business never has to worry about running afoul of someone to whom it owes money.

4. Improving Health

Working capital can tell you how healthy your company currently is. The current liquidity of a business, also the net working capital, is one of the most important determinants of its health. Liquidity tells investors how easily a company’s assets can be converted into cash. As the amount of money available for day-to-day operations, working capital is intimately tied to liquidity and how easily work can get done in the business.

5. Getting Loans

Every business owner hopes to be able to expand his or her business. In cases where large expansions are planned, a loan may have to be taken out. When a business has good solvency and credit, it is more likely to be approved for a loan. Good working capital, therefore, helps you not only expand using your own resources but also helps you find external funding for expansion.

6. Handling Crises

Any business is likely to face a crisis at some time in its life. How these crises are handled depend largely on the working capital available to the business. Firms with good working capital are able to absorb blows to their revenue stream and keep moving forward.

Make Working Capital Work for You

Working capital is either expressed as a money value (assets minus liabilities) or as a ratio (assets over liabilities). Any business should aim for at least a working capital ratio of 1.2. Whether your company is just getting off the ground or has been operating for decades, managing working capital is key to its profitability.

Managing working capital is an important skill to have. As we have seen, a company’s working capital is one of the most important pieces of information to know regarding its current health and future profitability. Managers who understand working capital and how to use it stand poised to leverage its many benefits to increasing profits.

Report this Content
This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.
Disney Plus

Millions of musical-lovers around the world rejoiced when "Hamilton," the hip-hop-mixtape-turned-musical harder to get in to than Studio 54, came to Disney Plus.

For those who had the luxury of being able to watch it in person and rewatch it with us mere mortals on our screens, the experience was almost as gripping as sitting feet from Lin-Manuel Miranda himself. From the stunning sets, graceful choreography, witty dialogue, and hauntingly beautiful singing, the experience was one even my musical-averse family felt moved by.

Keep Reading... Show less
Health and Wellness

We Asked You How You Felt About Resuming 'Normal' Activities, And Some Of Your Answers Shocked Us

The New York Times asked 511 epidemiologists when they'd feel comfortable doing "normal" activities again, considering COVID-19. We asked our peers the same thing, for science.

Last month, the New York Times surveyed about 500 epidemiologists asking about their comfort level with certain activities once deemed normal — socializing with friends, going to the doctor, bringing in the mail. That's all well and good for the experts, but they are a very niche group, not the majority of the population. What do "normal" people feel safe doing? In certain states, we've seen how comfortable everyone is with everything (looking at you, Florida), but we wanted to know where Odyssey's readers fell on the comfort scale. Are they sticking with the epidemiologists who won't be attending a wedding for another year, or are they storming the sunny beaches as soon as possible?

Keep Reading... Show less
Health and Wellness

Keto Is All Fun And Games Until You're Undernourished And Almost Pass Out

Keto is just another extension of diet culture that boasts rapid weight loss, but at a steep price.

Photo by LOGAN WEAVER on Unsplash

There has been a Keto diet craze going around in the past couple of years, with many of its followers claiming significant weight loss. With any new, trendy diet claiming miraculous weight-loss, one starts to wonder what exactly is happening behind the curtain. The keto, or ketogenic, diet is a very low-carb, high-fat diet that claims to help the body shift its fuel source from carbs to fat. In the medical community it has been prescribed to patients with uncontrolled epilepsy to reduce the frequency of seizures, but other than that there is little conclusive evidence to other potential benefits.

Keep Reading... Show less

Jennifer Kustanovich is not only the president of the Odyssey at Stony Brook University but is also an illuminating yoga instructor. She's an inspiring proactive leader in the wellness industry. Her expertise in movement expands onto Zumba and high-intensity interval training (HIIT).

On the last day of her in-person class, she gave everyone a way of contacting her and made sure to check up on all her clients. She wanted to ensure that they were doing okay and to remind them that she is always there.

Keep Reading... Show less
Lifestyle

These 5 Black Female-Owned Swimwear Brands Are Must-Haves For Your HOTTEST Summer Yet

To all the woman who put their money where their mouth is, lets do two things for the price of one.

The start of summer is always exciting,(especially after an unprecedented pandemic) and people are itching to make this particular summer count. Correction: with the amount gratefulness I have for life at this moment in time I am itching to make this summer count.

But at the same time, in the midst of social justice issues, activism is something that is at the forefront of many people's minds, including mine. With money comes power and buying Black is a way to directly help the marginalized and oppressed while getting something in return.

Keep Reading... Show less
Lifestyle

These Are The Black-Owned Restaurants In Chicago You Should Absolutely Be Supporting

Support the movement and your appetite at the same time with these amazing spots.


The Black Lives Matter movement is taking the country by storm to crash down systematic racism and liberate people of color. However, during these changing it can be hard to determine what you can do to make an impact besides reposting Instagram stories and texting petition numbers. Instead, support Black-owned businesses or, more specifically, Black-owned restaurants. Here are some outstanding and underrated Black-owned restaurants in Chicago that can help you support the movement.
Keep Reading... Show less
Swoon

10 Things To Know About LDRs, From A Couple Separated By The Atlantic Ocean AND A Pandemic

There will be challenges, but more often than not, it's worth it.

Most individuals in relationships have not been able to go on romantic dates in quite a while due to business closures in the wake of the pandemic. Other couples have encountered challenges while seeing each other face to face in the past three months due to coronavirus regulations. Long-distance relationships have unfortunately become a reality for many in this era of global health crises. Western New York native and travel journalist, Chelsea Baron, knows this all too well.

Keep Reading... Show less
Lifestyle

5 Easy Summer Mocktail Recipes You Can Make With Items You Probably Already Have On-Hand

Keep these drinks in mind next time you're visiting your local farmer's market — you might want to grab some extra mint and limes.

With Summer 2020 in full swing comes the addition of many fresh fruits and vegetables to brighten up your dinner plate, but also your glass! Farmers markets are my personal favorite place to look for produce that is in season to make fun mocktails with.

Keep Reading... Show less
Facebook Comments