Definition of Working Capital

Business Accounting Definitions

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THANANIT SUNTIVIRIYANON

What is Working Capital?

Working capital is the amount of liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business.

A lack of working capital makes it hard to attract investors or to get business loans or obtain credit.

What is the Accounting Formula to Determine a Business’ Working Capital?

The accounting formula used to calculate the available working capital of a business is:

Current Assets - Current Liabilities = Working Capital

Working capital can be reflected as a positive or negative number depending on how much debt the business is carrying.

Where Does Working Capital Come From?

From an accounting standpoint, working capital comes from:

Working Capital is Required to Start and Grow a Business

When you first start a business you need start-up working capital since the business is not yet making money to sustain itself. The number one reason most businesses fail during their first two years of operation is due to a lack of working capital.

Having ample working capital not only helps you to meet your obligations, it is vital to growing your business.

Ways To Raise Working Capital

Every new business is faced with the challenge of raising working capital.

  Here are some of the ways you can raise working capital for your own new, or existing business:

  • Borrow Money From Family or Friends - If you borrow from someone you have a close personal relationship with it is important that you still treat all financial actions as a business deal.  Make sure all loans or investments from personal contacts are in writing.  For practical guidelines on business transactions with family members and friends, read "How to Ask Family and Friends for Cash for a Business."
     
  • Debt Financing (Take Out a Loan) - The types of loans available to you will largely depend upon your credit, the type of business you are starting, and the type of business structure you have decided upon.  There are many sources of debt financing to consider including loads, microloans, and government sources.
     
  • Raise Funds through Crowdsourcing - Many budding entrepreneurs have raised working capital through crowd sourcing. 
     
  • Groupon - When the economy crashed in 2008, many business owners used Groupon to generate quick cash.  Be careful when using discount and voucher advertising platforms like Groupon because you could end up losing more money that it is worth in the long run.
     
  • Grants - There are many federal and state programs that offer grants to new startups.  Start by calling your local chamber of commerce and asking if there are any grants or incentive programs for starting a new business in your area.

Summary

Working capital is the money you need to cover business expenses, meet short-term obligations, and to grow your business. Start-up capital is the money you need to start a business until it generates enough revenue to pay for itself. Start-up and working capital can come from loans, grants, investors and partners, but many business women use their personal financial resources to fund their businesses.

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