Working Capital: How to Calculate and Increase It

Table of Contents

 

1. 1. Introduction

1. 1. What is Working Capital?

1. 1. Why is it Important?

1. 1. How Do You Calculate It?

1. 1. Strategies to Increase Working Capital

1. 1. Conclusion

1. 1. FAQs

Every movement in the business requires money. From small decisions to big ones, it will always require money for you to keep moving forward. Let us say for example, you are a logistics company, but for this month you are running low on cardboard boxes. Now the decision is simple: buy more cardboard boxes, and that is basically it.

But before you could procure more cardboard boxes, you need to check if you have the money to sustain yourself with enough cardboard boxes as a supply for a given period of time. In this blog, we will educate you about what working capital is, how to calculate it and how to increase it.

What Is Working Capital?

Working Capital simply means the money a business has to run its day-to-day operations. It is the cash needed by a company to pay for things such as supplies, salaries, bills, and other miscellaneous expenses like money allowance for transportation and etc.

If the business has a lot of working capital, it means that it has the financial resources to easily pay these expenses, and if the business has less of it, then the business will struggle to stay open.

Why Is It Important?

Working capital is important because it keeps the business running smoothly. Enough of it is the ideal situation for all businesses to avoid having to worry about unexpected expenses or even the expected expenses that come every month.

Having enough of it means a company can buy things in bulk, which also leads to more saving for the company or even quickly responding to market changes. Like for example, a printing company saw a temporary increase in demand for bond paper because there is a one-day activity in a school near them that involves bond papers. Having enough working capital means you can buy the required amount of bond papers to cater to this spike in demand.

How Do You Calculate It?

Working capital is simply the difference between current assets and current liabilities.

Where:

 

• • Current Assets include cash, accounts receivable, inventory, and other liquid assets.

• • Current Liabilities include accounts payable, short-term debt, and other immediate obligations.

Example Calculation

Let’s say your business has:

 

• • Current Assets = £150,000

• • Current Liabilities = £90,000

Working Capital = £150,000 – £90,000 = £60,000

A positive number means you have enough short-term assets to cover your liabilities.

Strategies to Increase Working Capital

The obvious way to increase your working capital is to increase your revenue, but there are also other ways to improve it. 

Here are other ways to increase your working capital:

1. Improve Accounts Receivable

 

• • Invoice quickly and clearly.

• • Offer early payment discounts to clients.

• • Use automated reminders to reduce overdue payments.

2. Manage Inventory Efficiently

 

• • Don’t overstock; implement a just-in-time inventory system.

• • Sell off slow-moving or obsolete inventory.

• • Use inventory tracking software for real-time data.

3. Extend Accounts Payable

 

• • Negotiate longer payment terms with suppliers.

• • Consolidate payments to avoid small, frequent outflows.

• • Avoid late fees, which can drain cash.

4. Reduce Unnecessary Expenses

 

• • Cut non-essential spending like subscriptions or travel.

• • Audit expenses regularly to spot waste.

• • Use tools to track and optimise spending in real-time.

5. Increase Sales Revenue

 

• • Launch promotions or bundle deals.

• • Improve customer experience to boost repeat purchases.

• • Invest in digital marketing to increase visibility and leads.

Conclusion

In order to increase your working capital, you simply just have to cut unnecessary expenses and keep track of your expenses. Negotiate with suppliers for a longer accounts payable and find ways to reduce the amount of time your customers pay for accounts receivable. It basically needs a lot of your negotiating prowess to achieve the ideal situation for your company but it doesn’t mean you have to hurry.

Take time to make changes and avoid sudden improvements; otherwise, it will overwhelm you. 

FAQs

 

1. Why is working capital important?
   It helps cover everyday expenses and keeps operations running without financial strain.
2. How can I improve my company’s working capital?
   Collect payments faster, delay payables when possible, reduce costs, and increase sales.
3. What happens if it is negative?
   It means your business may struggle to pay short-term debts and could face cash flow problems.
4. Is too much of it good?
   Not always. Too much idle cash might mean missed investment opportunities.