It doesn’t matter if a business is large or small. It is always critical to ensure that the company’s working capital system is working efficiently. Since working capital management is a business strategy (one of many) that strives for efficiency, naturally, that means it is essential to check up on the process here and there.
Working capital management monitors a company’s assets and liabilities, ensuring that cash flow is smooth and efficient. The primary focus of capital management is maintaining short-term operating costs and obligations.
Now, here’s the real question: how does a company check if their working capital management system is working as intended? A company can go about this process in several different ways. Read below for more information.
Calculating Working Capital
The easiest way to calculate working capital is by accounting for all current assets and then subtracting current liabilities. To put it simply, one must add up all of the assets and income a business has and then subtract debt and operating expenses.
Once this calculation is done, a business should have one of two working capitals: positive or negative. Positive working capital businesses have enough cash to handle emergencies and additional expenses – while still handling current obligations.
Conversely, negative working capital happens when a company doesn’t have enough assets to cover its current liabilities. This could be the result of a short-term change, such as new debt. If not, it is a sign to reconsider how the business is operating.
Increasing Working Capital
One way to rearrange the efficiency of working capital management is by increasing working capital. A company can do this in various ways, though it is best to research the options available before diving in.
For example, one option is to take on long-term debt. While this may sound counter-intuitive, remember that working capital focuses on short-term finances. In other words, by decreasing the amount of debt that a company must handle in the short term, it is increasing its working capital.
Alternatively, a company could opt to refinance the current debt it maintains. Once again, this would reduce current liabilities. However, it wouldn’t be adding new debt like the first option. If this option doesn’t sound feasible, a business can always sell some assets for a quick turnaround.