Working capital “¦ the lifeblood of growing companies, and a term every corporate accountant and analyst must have an intimate understanding of. Easily defined, working capital is simply the difference between current assets minus current liabilities, or the cash on hand for a company to use as necessary.
For any successful business to thrive, it must have ready reserves of working capital, which can be utilized at a moment’s notice. Without sufficient working capital, an organization is doomed to fail – regardless of the quality of its goods and services.
There are plenty of options when it comes to acquiring working capital; one of the more popular ways is a commercial term loan. For those who are in limbo as to what working capital really is, here is a general overview for you and your business.
How Working Capital “Works”
When a business experiences a shortfall of liquid assets, banks and financial institutions can effectively inject cash into the company’s coffers by loaning it money, known as working capital. The loaned amounts can be short or long term, and are backed by the company’s anticipated revenues from current inventories and outstanding amounts owed by customers.
While healthy companies can utilize working capital to maintain steady cash flow as a liquidity tool, hurting companies can use working capital to stay afloat, albeit with more stringent credit terms and payback parameters.
Necessity and Benefits
Working capital is as much an economic necessity for million-dollar manufacturers as it is for mom-and-pop retailers. With enough cash on hand, an organization has the luxury and financial flexibility to reinvest in itself. Without satisfactory working capital, a business is left cash poor and limited in how it manages its day-to-day activities.
The key to understanding and maximizing working capital is through liquidity; no matter the size of a business or the scope of its balance sheet, the amount of liquid assets will govern a company’s success through its ability to operate without undue financial strain or impediments to continued profitability.
About The Guest Author: James Malloy is the President of commercial banking at Conestoga Bank, a community bank which has served Philadelphia and the surrounding regions for over 120 years. This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.
Piggy Bank With Glasses Photo via Shutterstock