Working capital management is an essential prerequisite for every business to inevitably follow. However, in order to devise an apt working capital management strategy, the required knowledge about the term is quintessential. Therefore, the first question which needs to be answered is – what is working capital? And some other like what is importance of working capital for business owners.
What is Working Capital?
Working capital is the difference between a business’ net assets and net expenses i.e. net assets – net liabilities. This can also be explained as the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
Key Facts About Working Capital you Must Know:-
- The initial expenditure for your startup affects your working capital.
- Also, if you are planning to expand your business, it is better to take a loan rather than using your cash reserve for the same. If you continue to use your cash reserve for business expansion, your extra expenses will definitely affect your working capital.
- With your business expanding, and you make more and more profits, the working capital management will definitely increase and the sum of it will become much more in every working cycle.
- Last but not least, if something unfortunate happens as if your business faces a great loss at any point of time, your working capital will be impacted badly. It will go down by a certain amount, and you will have to find an alternate solution to suffice your working capital and make more profits.
To know more about working capital and how it is managed, you can refer to this article – What is the Working Capital Cycle and Why Must it be Managed.