How to Calculate Your Available Working Capital

Working capital is essential to running the day-to-day of your business. Without it, you simply can’t keep the lights on. Determining the amount of capital you have to work with each month is certainly not easy, but it can be done, and it must be done.

It’s essential you know how much you have to spend, so you don’t overspend. Therefore, become a pro at managing both your liabilities and assets, giving you a complete understanding of your working capital and allowing you to use this cash to its fullest potential.

In short, the amount of working capital you have is the total of your current assets minus your current liabilities. Be certain you are keeping track of these two figures to guarantee your working capital calculation is as accurate as possible, ensuring you know exactly how many dollars your business has to work with.

Managing Your Liabilities

Current liabilities are equal to what money your company currently owes people, such a suppliers or creditors. It’s short-term debt, all due within the year. In order to pay these liabilities, you have to turn your assets into cash. It’s important you keep watch over these figures when trying to properly assess your working capital.

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How do you go about doing so? It’s all about understanding who you owe money to, and when the cash is due.

No 1: First, start by always having reminders set in your calendar of when your payments are due. Make sure the reminder is set not only for the day of but also at least a week in advance, giving you enough time to prepare payment. Be diligent about getting those payments in on time.

No. 2: If you owe multiple payments to a specific lender, be sure to specify what a payment is for.

No. 3: If you are struggling with your cash flow (or you simply forget a payment date), be sure to start a conversation with your creditors about it. When you keep this sort of relationship with your lenders, it will let them know you aren’t ignoring the debt and can sometimes lead to them being more accommodating.

No. 4: On that same note, if cash is tight, ask your lender if you can send a post-dated check that can be cashed in thirty days. Some will be ok with this. Just be sure the check doesn’t bounce, as this will take away the opportunity to do it again if necessary in the future.

Managing Your Assets

Your current assets are any cash your business has or anything else you can expect to convert to cash. Examples of these assets are:

No. 1: Cash or Cash Equivalent - Currency and deposit accounts.

No. 2: Receivables - Any money you are waiting to receive from customers for a product you have sold or a service you have provided.

No. 3: Inventory - Any goods your business has in stock. Be aware there are different types of of inventory. For example, your first type of inventory is materials and components. These are the items that are needed to make the finished product. The second is progress inventory, and this refers to partially completed items. The third type of inventory is finished goods. These are any final products ready for purchase.

No. 4: Short-term Investments – Includes such things as securities bought with intention to be sold to generate income on short-term price differences.

No. 5: Prepaid Expenses – Expenses that are paid for and recorded as an asset before use (i.e. insurance).

All of the assets listed above are important to manage in different ways. For example, it’s crucial that you always keep an accurate assessment of the inventory your company keeps in stock. It’s also super critical you actively pursue any open invoices you have so you can turn those receivables into liquid cash faster. Most importantly, however, it’s important to keep a watchful eye over the actual cash you already have. Cash is king in your small business, and it’s important you understand what this cash is being used for. To do so, be diligent in both your cash flow forecast and cash flow monitoring. Tracking every dollar in and out is precisely what needs to be done.

Meredith Wood is the Director of Community Relations at Funding Gates, an online application for small businesses that allows them to track, organize and manage their receivables all with simple clicks. An avid small business writer, Meredith’s work can be seen on Amex OPEN Forum, SCORE, the Small Business Bonfire and many other small business sites. Connect with Meredith on Twitter @FundingGates.