Wednesday, 16 Sep 2020
Working capital can be regarded as the lifeline of a business as it accounts for the available funds that support its day-to-day operations. It signifies the liquidity or current financial standing of the business and can be calculated by deducting current liabilities from the current assets.
The working capital is a component of the operating capital, which also includes plant and equipment. It helps the entrepreneur to understand the financial capabilities of the venture and determine whether it can meet its debts or not.
Bookkeepers in Melbourne play a significant role in maintaining a positive working capital which supports the growth of the business. They ensure that the business owner makes sound investments and do not let the liabilities exceed the assets.
Thus every entrepreneur must be aware of working capital and how it can be maintained. So here is a rundown on everything that you need to know about this valuable financial component.
Working capital is the money available to a company that is needed for trading. It could be gained by applying for a business loan in Melbourne or making profits from the sales of goods and services.
It allows the entrepreneur to pay for the regular expenses while operating, such as the ongoing costs of the office lease, utilities, salaries and wages to employees, administration expenditure, etc. It can be calculated by using the formula, Working Capital = Current Assets – Current Liabilities. Thus the assets must always be higher than liabilities (short-term debts which should be paid in the next twelve months).
Your bookkeeper will also calculate the working capital ratio to determine if the working capital is sufficient or not. The working capital ratio (current liabilities/current assets) denotes the financial well-being of the business. If the ratio is less than one, then the company has negative working capital.
On the other hand, if the ratio is between 1.2 and 2.0, then it has a positive working capital. If the ratio is higher than two, then it implies that the business has an excess of assets that are not being utilised efficiently. It suggests that the entrepreneur has not been able to capitalise on the available opportunity or does not have the support of an able bookkeeping company. A negative working capital points towards the poor performance of the Melbourne-based business.
Working Capital is also known as circulating capital as it can change its form from cash into stock and back into cash quickly. Thus it has several types which are mentioned below.
Working capital is vital in sustaining the business through rough periods, such as a slow-growth phase or a slowdown in the industry. Thus working capital management is crucial for every entity operating in Melbourne. Here is how it supports a venture.
Calculating the exact amount needed for the smooth functioning of the business is not an easy task. A professional bookkeeper can help in this regard with his expertise and skills to establish adequate working capital for a specific business. Here are the factors that aid in deciding the right amount.
Many businesses face a working capital shortage in Melbourne while trading, and it can affect the daily operations. Your bookkeeper plays the key in managing the optimum working capital balance. In case of a deficit, you can look at these sources:
Working capital is the most basic requirement for running a business, and thus, you must understand it in detail. Your bookkeeper in Melbourne can guide you in making the best use of this money and keeping it available for the business operations.
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