What is Working Capital?Working capital is how much in liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business.
A lack of working capital makes it hard to attract investors or to get business loans or obtain credit.
What is the Accounting Formula to Determine a Business’ Working Capital?
The accounting formula used to calculate the available working capital of a business is:
Current Assets - Current Liabilities = Working Capital
Working capital can be reflected as a positive or negative number depending on how much debt the business is carrying.
Where Does Working Capital Come From?From an accounting standpoint, working capital comes from:
- Net income;
- Long-term loans (non-current liabilities);
- Sale of capital (non-current) assets; and
- Funds contributed by the owners and investors (stockholders).
Working Capital is Required to Start and Grow a Business
When you first start a business you need start-up working capital since the business is not yet making money to sustain itself. The number one reason most businesses fail during their first two years of operation is due to a lack of working capital.
Having ample working capital not only helps you to meet your obligations, it is vital to growing your business.
Summary: Working capital is the money you need to cover business expenses, meet short-term obligations, and to grow your business. Start-up capital is the money you need to start a business until it generates enough revenue to pay for itself. Start-up and working capital can come from loans, grants, investors and partners, but many business women use their personal financial resources to fund their businesses.