What Is Working Capital?
With most small business startups, an opening day balance sheet is needed to show items like cash on hand, receivables, other assets, and liabilities. The difference between the asset side of your balance sheet minus the liability side is, in essence, your working capital. Working capital should not be considered as cash on hand or cash in bank. To banks, lenders, and even the Small Business Administration or SBA, a business must have enough working capital to stay afloat in tough times or to keep as an asset during successful times.
If any business owner is looking for investors, bank loans or SBA loans, all of these will require the company show proof of working capital, what it represents, and where it came from prior to becoming an investor or offering a loan. Working capital, in some businesses, also consists of the owner’s equity (cash or assets put into the business) plus profits or retained earnings. To better understand how to determine your working capital, download a free opening day balance sheet template from our Media Gallery and complete the required fields for your business.
Now that you have an idea of what working capital is, how to you manage it?