As experts in the financial space, we often employ a variety of tactics when analyzing our clients’ business health. When looking for indicators of organizational success, many decision makers stop at metrics like revenue, expenses, and net profit. One statistic that tends to get overlooked, however, is working capital.
Here’s what every company should know about this sometimes neglected number:
Definition Of Working Capital
The best way to think of working capital is to consider it as a means to identify your company’s available operating funds. It is cash that can be used at a moment’s notice, available to pay for vendor goods and services that need to be compensated for immediately. In other words, it only pertains to funds that aren’t tied up in long-term investments. It’s the money you would have at the ready when an unexpected expense comes up, or when you have to pay a vendor invoice. To get this number, we take existing business liabilities such as accounts payable, accrued expenses, and loans – and subtract them from current assets including cash on hand, accounts receivable, and short-term investments.
Why It’s Important
The next time you are looking to identify and implement changes to your business’ bottom line, consider this easy to identify number. We love it because it’s a simple equation to solve, and yields a lot of valuable insight into the current status of your company. Most importantly, what makes this an especially meaningful performance indicator is the way it shows the extent to which your available assets can cover your short-term liabilities. Your business may have great revenue, but if the working capital you’ve calculated is consistently small, it may be a sign that you’re teetering on the edge of financial risk. The more working capital your organization has, the better equipped it will be to address unexpected financial hiccups in the future.
Evaluating performance and success rests on more than any one metric. We know that as a business leader, you’ve grown accustomed to monitoring your company’s financial health. Our team of experts is here to help you take an even closer look. If you’d like to work with a professional to cross-examine your finances using a variety of methods, we’d love to get in touch. For more information on other financial topics, check out our blog.