Why is Working Capital Important for Business Success? It is no secret that the financial health of a business is a great determinant of its overall success. Oftentimes when we talk of the financial health of a business; the focal point is always the profits made. But do merely profits suffice in the growth of a business? Profits surely have a significant impact but they are not the most important component of the financial establishment. What do you do when despite being in profit you cannot carry out your usual operational tasks? Such a scenario could occur when you deliver your services and are expecting a profitable amount but the payments are not being made in time. This is where working capital comes to the forefront. What exactly is working capital? Working capital is the capital available at hand which helps you run your day-to-day business practices. It is often referred to as the difference between a company's current assets and current liabilities. Current assets incorporate all the cash, inventory, and accounts receivable which can be liquidated to cash within a term of one year and current liabilities consist of the bills and loan payments you must make in a year. This implies to calculate working capital; one needs to find the difference between current assets and current liabilities; the result of which must be positive. A negative result indicates you have a deficient working capital and might run out of cash sometime soon.
Why is Working Capital Important for Business Success?
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