Very simple. Isn’t it?
Working capital has two components, current assets and current liabilities. As a matter of fact, it is sum-total of current assets less current liabilities. It will work for you, or for your business, if you keep it under efficient management. It will work wonders if the current liabilities are not allowed to overtake current assets. Then it will be the life blood of your business, it will keep your short-term creditors happy and away from you and meet all day-to-day expenses of the business. However, if you allow the current liabilities exceed current assets, your business will come to a grinding halt and you will be locked in legal battles with your creditors. The only business you will be running will be asset-disposal.
Word of wisdom: Learn ratio analysis and keep a watch on current assets and current liabilities. Don’t over-stretch your credit sales. Don’t keep your inventory for too long unless you have bought it for free. Timely collection of debts, delaying payments and effective internal control system are some of the soldiers that you can deploy for safeguarding your business territory. You don’t have to be a professional accountant to do that.
Some people use working capital to mean cash. It is not the whole truth unless all your current assets other than cash were financed through current liabilities.
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