Working capital is the amount of liquid assets (in cash or accessible as cash) to run and grow your business.
Start-up capital (which serves as working capital) should cover business expenses for at least one year or until the business can generate enough revenue to sustain itself.
Working capital is required for all new businesses to pay for licenses and other legal fees, purchase equipment, rent space, initial advertising, salaries, and virtually all other expenses that need to be covered until your business revenues will cover and exceed all expenses.
Ways to Raise Working Capital
Before looking at ways to find working capital, be sure that you first cut all expenses possible. The lower your expenses, the less working capital you will need to raise.
Working capital can be reflected as a positive or negative number depending on how much debt the business is carrying. The accounting formula used to calculate the available working capital of a business is:
Current Assets - Current Liabilities = Working Capital
If you run this formula and come up with a negative number, you need more working capital.
To determine how much additional working capital you need, start with the negative number (how much you are already in a hole) and multiply it by a negative 1.5. This math formula takes your deficit and adds 50% more working capital. That is the minimum amount of working capital you need to get back on track.
Current Assets of $5,000 – Current liabilities of $12,000 = (-$7,000)
(-$7,000) * (-1.50) = $10,500
If you have any other special projects that need to be funded, add that amount in as well.
Where Does Working Capital Come From?
From an accounting standpoint, working capital comes from:
- Net income
- Long-term loans (non-current liabilities)
- Sale of capital (non-current) assets
- Funds contributed by the owners and investors (stockholders)
From a practical standpoint, the less working capital you have now, the harder it will be to convince a lending institution to give you loans or credit. You may have better success with an angel investor or someone you know.