In the world of accounting, a company’s working capital is the difference between current liabilities and current assets. At its most basic, this type of capital dictates a business’ ability to meet short-term liabilities while continuing to be financially viable. This measure of operating liquidity is important in analyzing day-to-day functions.

For small businesses in particular, this indication of cash flow describes the amount of funds needed to maintain production. If your assets do not exceed your liabilities, the company runs the risk of not being able to pay short-term obligations in a timely fashion.


Managing Working Capital

The methods of balancing the needs of current assets and liabilities are key in managing this form of capital. Remaining cognizant of short-term loans and financing as well as credit purchases is a must. Some payables are due in increments of 15, 30 or 45 days but others might require immediate payments. This affects the sales tactics and monetary priorities on a daily basis.

Conversely, functioning capital also looks closely at asset liquidity. Some resources can turn into cash quickly while others take time to convert. Positive working capital is necessary, but it does not tell you everything. A handful of unpaid bills and a warehouse full of unwanted inventory can be just as financially influential as too many loans.

Inventory liquidness depends highly on sales. Stagnant merchandise and out-of-stock products must be noted in the calculation of this useful metric. Such monitoring yields detailed reports on company cash flow and helps accurately predict future sales.


Avoiding Bankruptcy

Businesses may face bankruptcy when they have insufficient capital resources to pay debts owed. Successful management of assets and liabilities allows companies to avoid this and continue pursuing profitable production operations. In the worst-case scenario, effective managing results in breaking even, which is always a desired goal in the five-year plan.

To improving working capital monitoring, there are several processes to guide you in such an endeavor. To begin, start with simple tasks like examining debt payments on a daily, weekly and monthly basis. In advance, make a plan on how to balance your upcoming expenditures with your incoming revenue.

Analyze your production costs for potential overspending. Simultaneously, try to maintain sales to increase your profits. Short-term problems can be handled through the exchange of short-term debt for long-term debt. There are many methods of current resource management, so just figure out what fits best in the context of your business.

Especially when applied to smaller companies, managing the difference between assets and liabilities keeps them open, operating and ready for business. It’ll keep your finances out of the tumultuous world of the bank loan and ensure successful daily operations.