Understanding Net Working Capital – How to Calculate It
While similar in theory to balancing your checkbook, business finances tend to be a bit more complicated. All small business owners are interested in their profit or their “bottom line.” They also want to grow their business and they can’t do that without enough working capital. Understanding what net working capital is and exactly how much a business has is vitally important.
Calculating Net Working Capital
Calculating net working capital involves a company’s current assets and liabilities. Current assets are resources a company expects to use or convert to cash within a year, such as accounts receivable or ready cash they have on hand. Current liabilities are amounts of money, such as accounts payable, that a company owes and expects to pay within a year.
Net working capital is the amount of money a company has to cover the cost of its daily business operations, such as purchasing inventory or paying bills. To calculate how much working capital a business has, the total current liabilities must be subtracted from the current total assets.
When reviewing the company’s balance sheet, go to the assets section and find the “Total Current Assets” line item. Let’s say the company’s total current assets are $55,000.00.
Then, go to the liabilities section of the balance sheet and locate the “Total Current Liabilities” line item. Here we’ll say the total current liabilities are $27,000.00.
Now, subtract the company’s total current liabilities from its total current assets to calculate its net working capital. With the figures used here as examples, subtract $27,000.00 from $55,000.00. The result is $28,000.00 in net working capital.
To help determine a company’s competitive position compared to others in the industry, compare its net working capital it competitor’s. If the example company has $27,000.00 in working capital and its top three competitors have $19,000.00, $17,000.00, and $12,000.00, the example company would have an edge when it comes to growth.
In this scenario, the net working capital is positive. This is not always the case. If the company’s total current liabilities are larger than the total current assets, the result is a negative net working capital. Positive working capital provides the necessary funds to grow the company. Negative working capital means the company will need additional funds.
How to Deal with Negative Net Working Capital
It’s a situation no small business owner wants to find themselves in, but sometimes it happens. In order to keep their business moving forward, they have to find a way to cover this working capital shortfall.
Applying for a traditional bank loan is often a time-consuming, dead-end street for a small business. There is endless paperwork, a long wait for a determination and it requires collateral and good to perfect credit.
When a business finds itself with negative net working capital, time is of the essence. The bills are not going to stop rolling in but without working capital, business could come to a grinding halt. With the time it takes to apply for a traditional bank loan and the majority of small business loans being denied, turning to the bank for help could be a fatal waste of time.
Today, many small businesses in search of short-term funding to cover a net working capital shortfall are utilizing alternative financing. CFG Merchant Solutions, a privately owned and operated specialty finance, and alternative funding platform.
CFGMS offers a whole suite of services small to medium-sized businesses that intend to use working capital proceeds in order to grow their business. Whether a business is looking to purchase inventory or equipment, bridge seasonality, support expansion, or invest in marketing and advertising, We can cater a working capital solution that meets those needs.
Our process requires minimal verification of income, limited credit history information, and little turnover time in an effort to help you as quickly as we can. Contact us today to see how we can help your business get the working capital it needs to stay competitive.