What is working Capital? Working capital is an important financial metric that measures a company’s ability to meet its short-term obligations and fund its operations. It is calculated as the difference between a company’s current assets, defined as the sum-total of cash, accounts receivable, and inventory, and its current liabilities, defined as the sum-total of accounts payable, short-term loans, and other debts that are due to be paid within the next twelve months.
Why is positive working capital important? Positive working capital indicates that a company has sufficient liquidity to meet its short-term obligations, while negative working capital suggests that a company will likely experience cash flow problems and not be able to pay its bills in the near future. Generally, a strong working capital position is a sign of financial stability and indicates that the company has sufficient resources to fund its day-to-day operations.
It’s important for a business owner to manage their working capital effectively to ensure financial stability and support growth. Regular monitoring and analysis of working capital, as well as implementing strategies to improve working capital, can help an owner stay on top of their financial situation and make informed decisions.
How does a business owner monitor and analyze working capital requirements?
- Close the books monthly
- Reconcile cash accounts monthly
- Review financial statements monthly
- Forecast future working capital requirements through financial modeling
A qualified Fractional CFO or full-time CFO should have the tools and skillset required to calculate and forecast a company’s working capital requirements.
About the Author
Barry Kehl is a Fractional CFO and a Partner of SignalCFO. SignalCFO was founded in 2016 and is a leading Fractional CFO firm located in Indianapolis, Indiana. They work with companies across the United States with expertise in SaaS (software as a service), manufacturing, professional services, insurance, data science and food service.