What is Net Working Capital and Why is it Crucial for Small Businesses?


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If you’re running a small business, working capital management is one of the best ways to keep your business afloat. Small business working capital is one of the most important factors in deciding whether your companies sink or swim. Here’s a brief overview of what it is and why it matters:

What is Net Working Capital?

The net working capital is the measure of a company’s current liquidity and can determine how capable a company is of repaying creditors in the near future. Businesses usually use working capital to measure cash flow and determine their ability to repay debts. Generally, working capital keeps a business running on a daily basis rather than adding to a business’ assets.

How is Working Capital Calculated?

In order to find your working capital, start by totaling your current assets. Your assets include cash and anything that can be liquidated or easily converted into cash within the period of a year. This includes securities like stocks and bonds, accounts receivable, inventory and prepaid expenses. The total value of your current assets is referred to as gross working capital.

Next, add up any current liabilities that need to be paid in one year. This includes taxes, wages, dividends, mortgage payments and accounts payable, among other things. Subtract this number from your gross working capital to get your working capital.

What Does it Mean When Net Working Capital is Positive?

If the number you get as working capital is in the positives, it usually means your business is growing. However, a very high number isn’t necessarily something to be proud of. It could mean the money you’re making isn’t being invested to improve the business.

What Does it Mean When Net Working Capital is Negative?

If your working capital is negatives, it means you have more liabilities than assets, or more debts than you can afford to pay. This is usually not a good thing, and you’ll often have a harder time keeping your business afloat under these conditions.

Over 80% of small businesses resort to some form of financing like merchant cash advances to finance their business, so some debt is normal. Just stay on top of your borrowing by tracking your working capital.

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