Working Capital for Startups

It’s every startup’s goal to become a successful and thriving business. To maintain your startup’s financial health, it’s critical for you to thoroughly understand working capital. 

Working capital measures the difference between your current assets and liabilities. It is also a key determinant of several aspects of your business, such as long-term growth and funding inventory. Whether you want to mitigate short-term debt obligations or apply for a performance bond, keep reading to learn more about the importance of working capital. 

What is Working Capital? 

Working capital is the measurement of the difference between what your company owns and what your company owes. It can be determined with the formula:

Current Assets – Current Liabilities = Working Capital

Current Assets are defined as good a company owns that can be turned into cash. Assets include things like accounts receivable, stocks & bonds, checking & savings accounts, inventory, and mutual funds. 

Current Liabilities are expenses or debts incurred by the company within the past year and include everything from accounts payable and income taxes to rent, salaries, and even supplies. 

Working capital is an effective way to measure your company’s short-term financial health, liquidity, and operational efficiency. It can also tell creditors whether your company is able to pay off debts within the year.

How Much Working Capital do you Need? 

The ideal amount of working capital is unique to each industry and business type. However, a healthy company will have a sufficient amount of assets to pay off current liabilities. 

The current ratio is determined by dividing current assets / current liabilities. It is essential to know your current ratio as it is a sign of whether you will be able to pay off your short term liabilities and debt. As a general rule, a higher ratio is better and indicates that you can readily fund daily business operations. 

Particularly for startups, it’s essential to understand what working capital is and why it is a key indicator of your startup’s health. For everything you need to know about working capital, check out the infographic by JW Surety Bonds below.