As a startup owner, you may hear frequent talk of working capital. Working capital is an accounting and legal concept that refers to the relationship between your current assets and liabilities. Specifically, you measure it by taking your current assets and subtracting your current liabilities. This article will examine what working capital means for startups in more detail. <\/p>\n\n\n\n
You can calculate working capital by referencing your startup\u2019s current balance sheet. The formula is:<\/p>\n \n
Working capital = Current Assets – Current Liabilities<\/em><\/strong><\/p>\n <\/p>\n<\/div>\n\n\n\n For example, consider the following balance sheet. <\/p>\n\n\n\n The current assets are \u00a3310,000. The current liabilities are \u00a3100,000. Therefore, the working capital is \u00a3210,000.<\/p>\n<\/div>\n\n\n\n Working capital is a way to gauge your startup\u2019s short-term health. In other words, your startup\u2019s working capital can measure how efficiently your startup manages its short-term financing needs. <\/p>\n\n\n\n Put simply, if your working capital is negative, you do not have enough assets to meet your liabilities in the short-term. Therefore, your startup may face insolvency. <\/p>\n\n\n\n On the other hand, if your working capital greatly exceeds your liabilities, you may not be adequately investing your startup\u2019s capital. <\/p>\n\n\n\n However, you should not treat your working capital calculations in a vacuum. For example, suppose you have just purchased new equipment with cash. In this case, your working capital may temporarily be negative until you generate sufficient sales and collect your receivables, at which point, your balance sheet may return to normal. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n<\/td> Amount<\/td><\/tr> Assets<\/strong><\/td> <\/td><\/tr> Current Assets<\/strong><\/td><\/tr> Cash and Equivalents<\/td> \u00a3100,000<\/td><\/tr> Accounts Receivable<\/td> \u00a380,000<\/td><\/tr> Inventory<\/td> \u00a3120,000<\/td><\/tr> Prepaid Expenses<\/td> \u00a310,000<\/td><\/tr> Total Current Assets<\/strong><\/td> \u00a3310,000<\/strong><\/td><\/tr> Non-Current Assets<\/strong><\/td><\/tr> Property, Plant, and Equipment<\/td> \u00a3400,000<\/td><\/tr> Investments<\/td> \u00a3150,000<\/td><\/tr> Intangible Assets<\/td> \u00a350,000<\/td><\/tr> Total Non-Current Assets<\/td> \u00a3600,000<\/td><\/tr> Total Assets<\/strong><\/td> \u00a3910,000<\/strong><\/td><\/tr> <\/td> <\/td><\/tr> Liabilities<\/strong><\/td> <\/td><\/tr> Current Liabilities<\/strong><\/td><\/tr> Accounts Payable<\/td> \u00a350,000<\/td><\/tr> Short-term Debt<\/td> \u00a330,000<\/td><\/tr> Accrued Expenses<\/td> \u00a320,000<\/td><\/tr> Total Current Liabilities<\/strong><\/td> \u00a3100,000<\/strong><\/td><\/tr> Non-Current Liabilities<\/strong><\/td><\/tr> Long-term Debt<\/td> \u00a3200,000<\/td><\/tr> Deferred Tax Liability<\/td> \u00a330,000<\/td><\/tr> Total Non-Current Liabilities<\/strong><\/td> \u00a3230,000<\/strong><\/td><\/tr> Total Liabilities<\/strong><\/td> \u00a3330,000<\/strong><\/td><\/tr> <\/td> <\/td><\/tr> Equity<\/strong><\/td> <\/td><\/tr> Ordinary shares + share premiums<\/td> \u00a3100,000<\/td><\/tr> Retained Earnings<\/td> \u00a3480,000<\/td><\/tr> Total Equity<\/td> \u00a3580,000<\/td><\/tr> <\/td> <\/td><\/tr> Total Liabilities & Equity<\/td> \u00a3910,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Why is Working Capital Important?<\/h2>\n\n\n\n