Everything you Need to Know About Net Working Capital | Behalf
Net Working Capital
Do you have good business hygiene? If you’re like most small business owners, your business is your baby. You want to keep it healthy so it can grow. LIke parenting, maintaining a healthy business is a full time job. As cash flows in through sales, you have to settle liabilities and cover operational expenses. When the dust settles, net working capital is the funds that are left. Your business’ finances constantly fluctuate so keeping a pulse on your net working capital is key. Net working capital is a measure of your business liquidity, which indicates the efficiency of your business. If you have a long production cycle, with significant time lag between making and selling goods, more of your net working capital is tied up. This article explains everything you need to know about net working capital so you can unlock your business potential.
The Big Picture
Net working capital is a part of your business working capital cycle. It’s a simple calculation of current assets minus current liabilities. The working capital cycle is in constant motion, so calculating your net working capital is a way for you to take a snapshot of your business’ finances. Your business requires a certain amount of net working capital to function. A net working capital shortage can occur when funds are tied up within your working capital cycle, but it is typically a symptom of a much larger issue. You want to catch shortages as early as possible and proactively maximize your business net working capital with effective working capital management.
You can’t manage your working capital effectively without a point of reference. Begin by comparing your actual net working capital to your net working capital requirement on a regular basis so you know where your business stands. Use the following formula to calculate your net working capital requirement:
(Net Working Capital Requirement) = (Inventory + Accounts receivable – Accounts payable)
This number is the bare minimum amount of funds your business needs to scrape by. Other factors can influence this calculation like your industry and business model. Ideally, you have more net working capital than what your business requires in case of emergencies. If you find you have a net working capital shortage, it’s time to take a closer look at your business and see where it might be hemorrhaging cash. You may need to reallocate the funds within your working capital cycle or tighten up accounting practices to free up more cash.
Even healthy businesses experience the occasional cash flow gap because of funds tied up in their working capital cycle. Those businesses don’t necessarily need more net working capital; they need a cushion to protect their finances when they experience slight dips in revenue. Behalf is built for healthy business that want to boost their net working capital and get better control over their cash flow. Behalf offers up to $50,000 of additional buying power to take the pressure off of your business accounts. You can use Behalf in place of cash, check, or credit card to pay virtually any of your recurring suppliers. Your suppliers are paid instantly, while you get up to six months of extra time to pay. Behalf’s flexible terms allow you to customize a weekly or monthly payment schedule on each individual purchase. Cushion your net working capital with Behalf and pay on your terms.