Working Capital and Loans

No matter it’s size or function, every business needs working capital in order to succeed.  The textbook definition of working capital is current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations.

When a business lacks working capital, where does the owner turn?  Usually to a bank loan or other means of financing.  Working capital is one of the most common uses for business financing, but what are some examples of working capital?  Any portion of day-to-day operations can be considered purposes for working capital.  Purchasing needed inventory and supplies, having more cash on hand to pay employees during slow times, having cash to use while waiting on payment against account receivables, and advertising and marketing are just a few examples.

The two main elements in any business cycle that absorb cash are inventory and receivables.  Cash flow is the direct result of positive or negative working capital.  By being aware of what aspects of a business are drying up cash flows, financing can be better pinpointed to achieve the result of getting the business back on track where it should be, instead of using the funds for purposes that seem like they would help, but might only do so in the short term.