U.S. small businesses are the backbone of the American economy, as the saying goes. And those 28 million small businesses have a backbone, too: working capital.
Working capital is the money small businesses have at hand to cover day-to-day expenses such as payroll, bills, inventory and marketing. Having enough of it is key to running a successful business because the more working capital you have, the less you have to stress about meeting your regular financial obligations. Plus, more working capital means more flexibility to invest in growing your business.
How to calculate working capital
Working capital is calculated based on figures from your balance sheet. It’s simply the difference between your liquid assets, such as cash or accounts receivable, and the money you owe in the short term, such as payroll, other monthly bills and debt payments.
Why working capital matters
Having positive working capital is key to your success as a small-business owner. Lenders and other creditors will look at it as a measure of your company’s overall health and your business’s ability to take on new debt.
Even successful businesses struggle with maintaining enough working capital, especially businesses with seasonal fluctuations and companies with a large volume of outstanding accounts receivable. To keep your working capital healthy, monitor it: Analyze your business’s financials, including the balance sheet and profit and loss statement, on a regular basis.
If you’re short on working capital, a small-business loan is one solution. It’s not wise, however, to use working capital loans to cover fixed overhead costs such as rent and payroll; you shouldn’t rely on debt to sustain your business. Instead, use the loan for long-term investments, such as buying new equipment, expanding to a new location or launching a product.
Find and compare small-business loans
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
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Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.
Image via iStock.
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