Know about the Finance and Investments Terms

How is working capital calculated?

Working capital can be obtained by subtracting the current liabilities of a business from its existing assets. 

If you divide the current assets with current liabilities, working capital ratio can be calculated. If this ratio ranges from 1.2 to 2.0, it denotes the business has sufficient working capital to run the business. On the other hand, a ratio of 1.0 or lower indicates the organisation is in trouble.

Types of working capital

There are two types of working capital- gross working capital and net working capital. The gross working capital can be obtained by adding the current assets of a business and the net working capital can be obtained by subtracting the total working capital from current liabilities.

Working capital is required for:

• Making the timely payments

• Maintaining the continuous cash flow

• Tackling the financial emergencies

• Utilizing the fixed assets

• Lowering the operating cycle

• Increasing the creditworthiness

But, in case you cannot manage these by your own, you can opt for a working capital finance. 

To know the reasons in details, read: 

Why Working Capital Management Matters for Businesses?