Working capital for business pertains to the cash utilized for the operational needs of the business. In accounting parlance, working capital for business is also referred to as current capital. The cash used as working capital for business is needed by the company to be able to pay for its day-to-day expenses or short-term obligations.
The most important expenditures that the company must finance as working capital for business involve converting raw materials to work in process then to finished goods. This is the production process needed to be able to produce goods which the company can sell for a profit. If the production ceases, so does the company. This is why having a ready working capital for business to finance production expenditures is necessary.
Working capital for business is usually tied to the inventory levels of the company, accounts receivable and accounts payable. The inventory determines the amount of sales the company will make. If the business sells its entire existing inventory then they may make a nice profit. This means they have enough working capital for business to be able to buy new raw materials and produce finished goods.
If the opposite happens, the business does not sell any goods then they may not be able to generate enough working capital to continue production. This is why the sooner the business can sell the goods, the faster they can generate working capital necessary for its day to day transactions.
Accounts receivable pertains to the money to be collected by the business. This is what the customers owe them. The sooner they can collect the receivables, the more money they can use to pay company bills or to produce more goods.
Working capital in business can also be reflected by its accounts payable. The company may borrow cash to be able to finance its business expenditures, buy new equipment or pay certain obligations. If the company manages the money it loaned well then they will most likely generate a good return for their investments.
There are various sources of working capital for business. One possible source is net sales. If the business makes a big profit, then they will have enough money to produce more goods.
Another source of working capital for business is the stockholders’ investments. If the stockholders buy more shares of stocks, the company will have working capital for business enough to finance its operations or investments.
In most cases, companies usually get working capital for business by availing of long term loans. This allows the company not just to continue production but also to invest in various business opportunities. This, in turn, will increase their chances of making a higher profit. Consequently, investors will invest more money because they know they will get a higher return for their investments.
A sound working capital for business reflects the financial health of the company. A company who manages its working capital for business well is perceived as efficient, financially stable and profitable. This image will boost their credit rating, allowing them to get better credit terms for their loans.