Work For It
Many people dream of owning their own business someday. Some people actually make that happen. They work for it, though. There’s no magic formula or happy accident that turns people into successful business owners. If you’ve ever thought this is a potential future for you, there’s no time like the present to start learning about the things you’ll need to know. For now, let’s talk about one area every business owner needs to know about regardless of the type or size of your company: working capital.
Every business needs to maintain a fund of working capital. What is that, though? It’s the money you have at your fingertips to meet your short-term needs and goals for your business. This isn’t about planning for the future. Working capital is for current expenses. The way you figure out how much you have is to subtract your current short-term liabilities from your assets. Short-term assets are the cash in your business account and the money owed to you that you can expect to be paid. Your short-term liabilities don’t include the balance of your long-term loans, just the amount of the next payment or two you need to make as well as the salaries, taxes and other debts you may owe right now like your electric or water bill.
A different number to know that may influence your success is your working capital ratio. To get this, you divide your current assets by your current liabilities and you get your working capital ratio. The reason this helps you is that it is a measure of your company’s current financial health. Most business can operate well on a 2:1 ratio. Checking your ratio frequently gives you an overall picture of the seasonal changes in your business.
Time to Get Help
Most businesses go through a time when they need extra working capital. If you have a long-term project with a big payoff at the end, you may need to find some extra money for day-to-day operations before that payoff hits your checking account. Mapping your working capital ratio at regular intervals will help you to see when you’re falling behind and may need some help. Some businesses have seasonal needs. For example, a landscaping company that needs new mowers in the spring will need an influx of working capital to afford them before their busy summer season. Look into lines of credit or business credit cards to see what will work best for you.
Working capital is just one area that business owners need to know about to be successful.