“Capital” means money and “working capital” means the money available to finance the day-to-day operations of a company. Essentially, these are the resources that a company has to work with.
In financial terms, working capital is the difference between current assets and current liabilities. Current assets (follow the link for more detailed information in English) are the money you have in the bank, plus any assets you can quickly convert into cash when needed. Current liabilities are debts you have to pay back within a year, so working capital is what’s left when you subtract your current liabilities from what you have in the bank. In general, working capital is also an indicator of the financial health of your business. The bigger the difference between what you own and what you owe someone, the healthier the business is. Unless your debts far exceed what you own, in which case you have negative working capital and are close to going out of business.
See also: 5 Top Options for Working Capital Financing
Key figures
When you divide your current assets by your current liabilities, uae email list you get a number that represents the relative financial health of your business. This is called the working capital ratio.
Assets/current liabilities = working capital ratio
Example: €200,000/€150,000 = 1.33
A working capital ratio between 1.2 and 2 is ideal. This means that you have enough cash to pay off your debts, target audience it simply saves your money but not so much that it sits idle.
A ratio below 1 means you have negative working capital and difficulty servicing your debts.
A ratio above 2 shows that you have a lot of excess capital that you could reinvest in your business but aren’t. If you have excess money, anhui mobile phone number list you’re not making smart decisions about your finances.
Companies with a high need for working capital
Businesses that operate cyclically or seasonally tend to have higher working capital requirements than businesses that operate year-round. This is because debts must be repaid even when business is slow or the company is not operating. This means more assets must be saved to get the company through these difficult times.
An example would be a Halloween costume business that thrives in the fall but needs capital to sustain the business during times when costumes are less in demand. The same could be true for a farmer’s market or a landscaping company.