Although First Financial LLC is best known for being an equipment financing and leasing company, we also offer businesses working capital loans that can be taken out on their own or in tandem with a financing or leasing deal. This blog will provide a more detailed explanation of working capital, the difference between assets and liabilities, and ways businesses can help improve their working capital.
What is it?
Working capital, also referred to as net working capital (NWC), is the money a business has available to meet their everyday operational needs. In the finance world, you’ll see this expressed as the difference between current assets and current liabilities. Let’s dive into this formula a little deeper.
Current assets cover everything that can be liquidated or quickly turned into cash within the year. This is what business owners use to fund day-to-day operations. Cash is arguably the most important current asset a company can possess, but other current assets include:
- Accounts receivable
- Checking and savings accounts
- Mutual funds
- Prepaid expenses
- Marketable securities
- Other liquid assets
Current liabilities make up all of the short-term financial obligations that are due within the year. These debts are gradually paid for using incoming revenue and, therefore, are a key factor in planning the company’s finances. Business owners must make sure their current assets equal or, preferably, exceed their current liabilities to certify their company is in good financial standing.
Current liabilities consist of:
- Accounts payable
- Short-term loans
- Accrued expenses
- Interest payable
- Taxes payable
- Payroll Liabilities
- Bank account overdrafts
- Dividends declared
- Unearned revenue
Why is it Important?
Working capital is a measure of a company’s ability to meet its short-term needs. Without this metric, business owners or management teams wouldn’t be able to plan for the company’s future, make sound financial decisions, meet their debt obligations, or even ensure employees will receive their next paycheck! Financial experts agree that stable working capital is critical to a company’s financial well-being and profitability.
Can Working Capital be Improved?
With a good financial team by your side, the answer is: always!
An easy way to start improving your working capital is by looking at your company’s expenses. Is everything you’re paying for necessary, or do you have some wiggle room for eliminating unneeded or redundant overhead costs? At the same time, take a look at your inventory. Are you stockpiling unused assets? If so, you’ll need to devise some new tactics on how to manage the inventory flow better, so products are received and sold in a timely fashion instead of collecting dust in storage.
Something else you can do is look for tax incentives. By taking advantage of business tax credits, you get to keep more money in the company’s wallet, effectively increasing your current assets.
Finally, you might consider a working capital loan. This is a short-term solution to increasing working capital that can provide amazing long-term benefits if utilized correctly. Watch this short video to learn more.
At First Financial LLC, we are here to help your business grow and run smoothly. If you’re interested in learning more about our working capital loan terms, please contact us today!