What Is Working Capital?

Working capital is a funding/loan you need to be familiar with when running a business. This type of capital finances the everyday operations of a business. Working capital for Amazon sellers boosts their businesses and competitiveness in the Amazon marketplace. 

Working capital is crucial for meeting your business’s current and short-term financial needs. Meeting your short-term financial obligations will boost your company’s operational efficiency.

What to Know About Working Capital 

An expansion of your business means an increase in its financial needs. Understanding the working capital will help you regulate your company’s current assets and liabilities. You will know how to balance the two and get financial gain. Here are some key things you should know about working capital. 

Components of Working Capital 

Understanding the components of working capital will help you calculate it accurately. You will also be able to analyze your company’s liquid assets. Check out these common components of working capital:

Current Assets

These are the assets your business can convert into liquid money within a year. Current assets cater to the costs of daily operations in businesses.
Several things compose the current assets. Examples are inventories, trade receivables, prepaid expenses, and bank balances. 

Cash and Cash Equivalents 

Cash and cash equivalents are key components for maintaining the smooth progress of businesses. These components represent liquid cash or assets that can be converted into money. Cash equivalents include treasury bills, banker’s acceptance, and liquid investments.

Inventory 

These are the stocks that your business purchases. They include those in the production process or those stored for resale. The profitability from your turnover inventory determines your business’s growth and success.

Accounts Payable 

Accounts payable is the debt your business has. These components are the requirements for your company to clear its debts. Negotiating with your creditors is a way of managing accounts payable.

Accounts Receivable 

Accounts receivable is the money your business should get from various sales. The component comes under the head of current assets in the balance sheet. Proper management of accounts receivables will improve your company’s current and future financial health.

Types of Working Capital 

The balance sheet view determines working capital classification. Here are the types of working capital based on this view.

Gross Working Capital 

These are the total current assets in your company’s balance sheet. They may include cash, marketable securities, and other short-term assets for your business. This type of working capital is always negative and does not represent the company’s liquidity.

Fixed Working Capital 

You need this working capital when starting your business. Fixed working capital starts and maintains businesses in their early stages. 

Also known as permanent capital, this working capital will help you run your business effortlessly. You can consider it whenever your company is in a dull period. 

Net Working Capital

Net working capital is the money you get when you subtract current liabilities from current assets. This is the working capital that represents the company’s liquidity. Basically, net working capital helps you know whether or not your business has enough cash to cater to its financial needs.

Variable Working Capital 

This is the difference between permanent/fixed working capital and net working capital. Your business needs variable working capital to meet its seasonal needs. Variable working capital depends on the size of a business; the smaller the business, the fewer the fluctuations, and vice versa.

Benefits of Working Capital 

Working capital can improve your business in many ways. You can easily achieve your business’s short-term and long-term goals with it. Check out the benefits your business can get from working capital:

• Working capital meets the short-term requirements of small and medium businesses.

• You can easily plan your employee payments.

• Working capital can maintain your business’s cash flow.

• Working capital can enable you to buy business items in bulk and take advantage of discounts.

How to Boost Working Capital

A predictable cash flow fuels the operational activities and overall growth of a business. Knowing how to increase your company’s working capital helps to secure future cash flow. There are key techniques you can use to improve the working capital.

One feature is shortening the cycles of operations in your company. Short operational cycles get the current assets converted quickly into money. Longer cycles consume money and increase the chances of non-payment.

You should also not fund your company’s fixed assets with working capital. Fixed assets are costly, and using working capital to finance them can impair your business’ growth. Long-term loans are the best for financing fixed assets in your company.

Consider Working Capital for Amazon Sellers

Small and medium businesses face many financial challenges, which hamper their progress. Working capital is the best solution if your small business is about to crumble. If you sell products in the Amazon marketplace, working capital for Amazon sellers should not be an option.

At SellersFunding, we aim to improve the scaling of businesses by ecommerce sellers. We believe that ecommerce is dynamic and that technology impacts consumers’ behaviors. Besides providing working capital solutions, we also provide payment solutions and analytical solutions.

Leave a Reply