Why you Need to Calculate your Business’s Working Capital?
Actually, one-fifth of new businesses fail in the first year, and this happens to around one-third in the second. Generally speaking, insufficient working capital is one reason for business failure.
That is why NWC is also an important sign of your company’s financial health, which pertains to not just yourself, but to your investors, lenders, plus other third parties. The more networking capital your business has, the more liquid it is at least in the shorter term. A positive figure, which you get when you minus current liabilities from current assets, means that your business’s debts can be paid off and that you have money on hand to fuel expansion and cover emergencies. Conversely, a business that is struggling to cover its short-term expenses may not last long.
NWC is a snapshot of the financial state of your business at a point in time. Much like any other figure in the balance sheet, it can change considerably over time—needless to say, even from one day to the next. When your current liabilities or assets change, so does the working capital of your business.