How To Calculate Net Working Capital in 3 Easy Steps | Behalf
For many small business owners, working capital is the big green elephant in the room. Don’t be afraid to grab it by the tusks and get back in control of your business. Working capital is simply the available funds you use to cover your immediate and short term business needs. You want to keep track and calculate net working capital constantly because it is a strong indicator of the health of your business.
There are automated working capital calculators online that allow you to calculate net working capital instantly. Some working capital calculators also allow you to adjust the inputs so you can better gauge the areas where your business needs to improve its performance in order to optimize its gross margin return. However, many of these working capital calculators use distracting technical jargon, which can leave you more anxious about your cash flow than before you started. If you want a simple way to calculate net working capital that you can easily digest and a better understanding of what an automated working capital calculator does, follow this simple step-by-step guide on how to calculate net working capital for your business.
OBJECTIVE: Calculate net working capital by subtracting your current liabilities from your current assets.
FORMULA ON HOW TO CALCULATE NET WORKING CAPITAL: (Current Assets) – (Current Liabilities) = (Working Capital)
Step 1: Calculate Current Assets
Current assets are the property your business presently owns that will be converted to cash within a year (i.e. inventory, accounts receivable, cash on hand and short-term accounts).
Where to Find:
You should be able to find a subtotal of your current assets on your business balance sheet. If not, go line by line on the balance sheet and add up the value of accounts that meet the definition of current assets (i.e. inventory, accounts receivables, cash, etc.).
Step 2: Calculate Current Liabilities
Current liabilities are payable amounts that are due within the year (i.e. accounts payable).
Where to Find:
Similarly to step 1, a subtotal of current liabilities should be located on your balance sheet. If not, add up the liabilities listed on the balance sheet (i.e. taxation payable, payables and provisions, etc.).
Step 3: Subtract
Now that you have values for your current assets and current liabilities, plug them into the following formula:
(Current Assets) – (Current Liabilities) = (Working Capital)
E.G. $75,000 – $42,000 = $33,000
The resulting amount is your working capital. In the provided example, the business has $33,000 of working capital. In other words, after the business pays its liabilities out of its assets, it is left with $33,000 to use for covering operational costs or any other business purpose.
Note: If the result is negative, your business has a working capital deficit and is at risk of insolvency. You may need to seek sources of long-term financing.
Even when your working capital is positive, you could still intermittently experience a cash flow gap. It is extremely common for growing businesses to be burdened by long outstanding receivables – especially if you give your customers generous payment terms – and get into a pinch for meeting your own payable obligations. This is not the mark of an unhealthy business. Quite the contrary, it usually means your demand is outpacing your capital to fulfill supply. For these types of short term working capital deficits, there are smart and simple short-term financing options available.
Behalf, Inc. is a fintech provider that provides short-term business credit lines to small business owners. You can qualify for a Behalf line of credit to fund production, inventory, or general business purchasing. With unprecedented term flexibility, you can create a payment schedule for each purchase and give yourself up to six months to fulfill your payment. That’s plenty of time for your receivables to come in.