Working Capital wh at i s i t a n d w h y i s i t i m p o rta n t t o e n t r e p r en e u r s ?
by Michelle Davis
as an entrepreneur
who is just getting started, the term
working capital ratio is:
working capital may sound like an advanced-level, irrel-
working capital ratio
=
evant snooze-fest. Your business graduates from start-up
current assets/current liabilities
websites, grassroots promotions and small investments
Working capital is often obtained from one of a few
drawn from discretionary income. It eventually develops
sources. Some of these options are best suited for start-ups
into a tangible and profitable product or service. At this
while others are more relevant to operational businesses:
stage, working capital becomes more than just savvy
• Savings/owner’s equity/liquidating personal assets
business jargon; It becomes a primary driver in making
• Percentage of revenues (working capital/gross sales x 100)
progressive business decisions. My journey started when I stepped back from my
• Trade or Vendor Credit
safe, idolized full-time, unionized government job with a
• Business Credit Cards
pension. I had a great idea and decided I would sacri-
• Business Line of Credit
fice my “job security’’ to venture into the world of entre-
• Business Loan
preneurship once again. Since my business was a service
• Investors
based platform, in what was a lack of insight, I did not
• Family & Friends
think I needed much working capital to keep me going once I got started. I was
wrong!
Use discretion when deciding where your working
In fact, I was quickly
capital source is coming from and do a S.W.A.T.
reminded of the reality that “it takes money, to make
(Strengths, Weaknesses, Opportunities & Threats) anal-
money!” Working capital is just that. It is the money that
ysis at least twice a year. Many business owners are savvy
you need to continue making money.
in a specific area of their business, but not all areas. If
Working Capital can be most simply defined as the
understanding the financial overview of your business is
amount of cash, account receivables, inventory and other
not your strong point, get support!
liquid assets that a business has available for daily opera-
of a bookkeeper, accountant or business financial analyst
tions after all its current liabilities such as payroll, account
who is good at simplifying details and who will help you
payables and other expenses are accounted for. The basic
review and understand your data.
formula to calculate this is:
Now that you understand the basics of working =
capital and how it is calculated, why is it even important?
– current liabilities.
The money used for working capital is important, because
working capital current assets
Access the services
A healthy working capital ratio for most industries
it is the primary asset used to cover the payments and
is between 1.2 and 2. The basic formula to calculate the
purchases of a business that keep it operational. By effec-
38 .
issue ii
