While all business owners want to have decent working capital, they may not know how to determine it. This accounting term refers to the sum of a company’s current assets less its current liabilities. Coming up with the right figure for working capital also requires knowledge about what to include for assets and liabilities.
What is a Business Asset?
Some business professionals make the mistake of thinking that assets only include cash. However, a business asset can be anything that provides current or future benefit to the company. Some common examples include buildings, equipment, accounts receivable, inventory, supplies, and – of course – cash. Anything of value that the company expects to liquidate and turn into cash over the next year can be considered an asset for the purpose of determining working capital.
What is a Business Liability?
A liability is a debt or another financial obligation that a company must pay currently or within the next 12 months. Typical examples of business liabilities include accounts payable, wages and salaries, income tax, employment tax, and notes payable.
How Lenders Consider Working Capital
If a company applies for a loan, the lender will first try to determine whether it has a healthy working capital ratio. Any amount lower than 1.0 could mean that the company doesn’t have enough cash and other assets currently available to remain current with the loan. Lenders also don’t like to see applicants with too many assets since it could indicate that management doesn’t run the business as efficiently as it could. That means lenders are typically most willing to approve applicants for a loan with a score between 1.0 and 2.0.
Ready to Learn More?
Whether you want to apply for a business loan or want to learn more about improving your company’s financial situation, we invite you to contact Monstera Lending Group to discuss your options.