Working Capital Loan Requirement
Working capital is a monetary resource available to fund the business’s day to day trading. It can be calculated by subtracting total current liabilities from total current assets. Financially, a liability is something that a business has an obligation to pay for. Buildings, machinery, stock and grants are examples of assets. A business collateral loan, supplier credit and wages are a few liabilities that a business may have. Working capital deficit occurs when the previously stated calculation results in a negative result. The opposite of a working capital deficit is positive working capital. A business with positive working capital is one that has sufficient funds to operate in its chosen marketplace. Although positive working capital is important, a business can still run into trouble when there is lack of liquidity.
Liquidity is a financial term which is used to describe the selling ability of a company’s assets. If a company has insufficient liquidity there is difficulty in gaining profits from selling assets. This can be down to the business’s product lacking sufficient demand to promote positive working capital. The time period between collecting raw materials, manufacturing and selling may also contribute to a business having poor liquidity. A liquid asset can usually be sold very quickly. This kind of asset is in high demand at all times and produces high profit for the trading business when eventually sold.
Maintain Normal Operations
The working capital requirement of a business is the amount of resources required by the business to maintain normal operation. The requirement is equal to liquid assets minus short-term liabilities. Future liabilities can be properly budgeted for by taking into account current liquid assets or future revenues. A graphical representation of the requirements calculated quarterly will help to show potential problematic financial trends.
Do not Underestimate the Need for Working Capital
The importance of having sufficient working capital funds cannot be understated. If a company does not budget for future developments then it is more than likely the business will have problems. Prudence is the key to success. Stories that you hear from professionals who take risks should not be used to inspire the running of your business. You do not hear from people who become bankrupt due to exercising such pomposity. Ensure that you make your own success one of careful and relentless planning and not a gamble that just happens to pay off.
Please visit working capital for a more detailed list of articles