Accounting: Making Sure 2 + 2 = 4

Accounting: Making Sure 2 + 2 = 4

Do You Have Sufficient Working Capital In Your Business?

Dwayne Barnes

The more complicated your business becomes, the more you need to keep an eye on crucial metrics and overall performance. You may need to understand the meaning of "working capital" as this can mean the difference between trading comfortably or technical insolvency. So, how do you define working capital, and what can you do to ensure that you're on the right side of this particular metric?

Giving Your Business Some Breathing Room

In many respects, working capital is padding. It's a figure that you get when you take away your current liability from your current assets to show how much money you effectively have to keep the business afloat. In other words, this is the cash you have without needing to borrow, inject some of your personal capital or sell assets instead. When your working capital is positive, you should find it a lot easier to deal with any unexpected issues or weather any economic downturns.

Defining Working Capital

Working capital is effectively made up of cash in the bank, money that is due to you (debtors), the value of your stock and any work in progress. If you add all those figures together, you need to deduct any money due to creditors and taxation.

Don't assume that a business overdraft is an asset because it is a liability. You cannot use an overdraft to calculate a positive cash balance, as that facility could be called in by the bank in question.

Improving Your Working Capital

Ideally, you should build up cash to give you enough money for the proverbial rainy day. How you calculate this will vary according to the size and nature of your business, but it could represent your business overhead costs for a certain number of months.

You may find it advantageous to discuss better terms with suppliers to give you better liquidity or, in some cases, renegotiate any debt arrangements you have in place.

Getting Professional Help

It can often be difficult to keep on top of these calculations when you're trying to run the day-to-day elements of a growing business. This is why you should always have an experienced business accountant on your side. It'll be their job to keep an eye on those crucial metrics and ensure that you always have sufficient working capital in place. They will advise certain tactics to help you improve if you are not quite there yet.

Reach out to a business tax accounting service to learn more.


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About Me
Accounting: Making Sure 2 + 2 = 4

Hello. When you are at school, maths can seem so complicated at first. But then you learn about numbers and all of sudden everything seems as easy as 2 + 2 = 4. I used to be pretty good at maths so when I started my own business, I didn't think I needed to hire an accountant. After all, why should I pay someone else to do something that I could do myself? However, I very quickly learnt two important lessons. Lesson one was that accounting and doing the books will take a lot longer than you might think and, secondly, it is actually pretty complex stuff. In the end, I decided to hire a professional accountant. He is great and he has taught me a lot of cool stuff.