The Importance of Working Capital

Annette Davis

Budget and Finance

Larry Simpson

ABSTRACT
Working capital is managing your capital. It is a reminder that current assets minus your current liabilities. It represents the liquidity that’s available to a business through a financial metric. What’s very important is that if you are in any type of business you are going to have assets, rather they are long term assets or short term, as your company grows so will your assets. However, you want to have a positive working capital which signifies that as company you can pay off your short –term liability almost instantly. Negative working capital signifies to others that you are not able to do so. In most instances, Small small businesses have to really be careful, they want to be able to present an almost perfect Bbalance when it comes to successful operations. Small businesses can lack the capital to be able to maintain large losses.

The formula for working capital is simple, . How it works/Example:
From a balance sheet:
You would take all you assets minus your Liabilitiesliabilities Cash 60,000 Account Payables 30,000
Accounts Receivable 40,000 Notes Payable 10,000
Marketable Securities 10,000 Accrued Expenses 20,000
Inventory 50,000 Current liabilities 10,000

Using this example Above (Total Current Assets) 160,000 - 70,000 (Total Liabilities) = 90,000, which gives you 90,000 to work with, which is your working capital.
It is the job of all top individuals involved in the company to try and handle your working capital, because you don’t want all your cash tied up in thing like inventory and expenses. Managing working capital 
You have to know how to mange your working capital, . Iif not handled properly, you could be headed for a down fall and maybe even bankruptcy.
Managing working capital essentially entails managing the cash flow of a business on a daily, weekly and monthly basis in such a way that satisfies all debts while reserving enough capital to continue operations and the generation of profits
( N.D.,W Gish, D Media).

A good Examples example of best practices in are the car manufacturers. They use Just- Iin- Ttime delivery to have components delivered directly to their production lines at the exact point where the component is fitted to the car. When this is done, they can then ask their supplier not to invoice them until later after their finish product has rolled off the production line.
If you manage your borrowers timely and you enforce the terms, then you can buy yourself time. a Tnd the more credit you can get from suppliers, the longer you take to pay our bills, and the better our cash flow position.
(Cinnamon, R; Helweg-L, Brian. London: Kogan P 2006).

Which personally I don’t think is a good idea; because to me that just means that your debts can build up, and you will have more to pay off at the end. I don’t own a business, but I have worked with owners of business, and I learned first- hand how a business can drown in debt. You will gradually lose control, . If you don't manage your debt, your debt will begin to manage your business-as well as you, and if that happens it will almost be impossible to get out of.

Within working capital is inventory. Watching inventory is just as important when it comes to managing your working capital. The longer inventory sits on the shelf or in the warehouse, the longer the company's working capital is tied up and with less cash coming into the company( Flanagan, B. 2005). and wWhen not managed carefully, organizations can run themselves out of cash by needing more working capital to expand plans; . Further more, a lot of companies would sometime use cash to pay for everything. Rather than seeking investors or maybe even financing that would make it easier for them and