Summary: Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs.
There are many facets to understanding the finances of business. For businesses of any size, understanding the basics of accounting and financial principles is essential to the growth of the company. A fundamental concept is working capital, or the money available for the day-to-day operations of the business. Not enough working capital means not enough cash to pay for the necessary expenses of the business.
Working Capital Calculation
Working capital is calculated as:
Current Assets – Current Liabilities = Working Capital
Simply put, it shows how liquid the company is in its ability to meet its immediate obligations and then have excess capital left over to deploy in business growth.
Sources of Working Capital
There are a variety of sources for working capital such as the sale of assets, funds from investors, loans, net income, and money from the business owner directly.
Working Capital Situations
Working capital is needed at the beginning phases of a business since the company is not yet self-sustaining. Beyond the starting of the business, working capital is also what grows the business over time.
Raising Working Capital
There are a variety of ways to raise more working capital to start or grow a business.
-Friends & Family
You can borrow money from friends and family as long as you get the financial transaction in writing and all parties understand the loan. It’s tricky to borrow money from your personal circle, however friends and family might be the easiest and quickest way to get working capital.
You can take out a loan through a bank (also known as debt financing). The loan types available will rely on your personal credit score, the type of business and the business structure.
In the age of the internet, fundraising through crowdsourcing such as Kickstarter is hugely popular. A large part to crowdsourced funding is the ability to market yourself well over the internet.
Consider getting investors to inject funds into the business if you need a substantial amount of working capital. Remember that investors are looking for a return, whether it’s in the form of selling the business later or going IPO.
Federal and state levels may have grants available to new startups. You can start by contacting your local chamber of commerce to see if there are programs for startups.
Finances of any business can be difficult to maneuver, however working capital is one of the most vital aspects to get right from the very beginning of your business.