post by:
Michael Goldstein
All ecommerce business owners need to know what working capital is, no matter the current state of your assets and liabilities. It’s very different from cashflow. This number will decide your current and future financial decisions. Without it, you would be blind to long-term expenses and unprepared for short-term opportunities. With this basic guide, you’ll have the information you need to approach your budget with assurance in your abilities. Sound like something you’re interested in? Let’s get started.
What Is Working Capital?
Working capital is the money you have after expenses have been accounted for. Sometimes called net working capital, this can be a positive or negative amount. In short, it’s the number that tells you how well your business is doing. Knowing this amount will help you determine if you need to adjust your budget or sales strategies.
Gross Working Capital is the number before expenses are deducted. This may not be a helpful number, but it’s nice to know where you stand. It may encourage you to cut costs, so the net working capital isn’t such a low amount compared to the gross.
What Is The Difference Between Working Capital and Cashflow?
These two terms may seem like the same thing, but there is a vital difference between the two. Cashflow gives insight into your finances during a certain period of time, whereas, working capital includes upcoming expenses and outstanding invoices. To sum it up, working capital is the big picture.
You can use working capital to prepare for upcoming changes. This allows you to see where you need to alter your plans and spread out your cashflow to compensate for additional expenses or slow seasons. Keep these two terms separate, as it could mean negative surprises down the line if you don’t.
What Is The Difference Between Working Capital Ratio and Quick Ratio?
Sometimes called a current ratio, working capital ratio is a simple formula that calculates liquidity. It’s the overall view of your business’s ability to meet short-term costs (usually a year’s worth). This number is necessary to know if you plan on meeting your financial goals.
Quick ratios offer you insight into your “emergency” funds. If sales are down or balances haven’t been paid (accounts receivable), can you pay your costs with the bare minimum you have? It’s a good question to ask, so you’re prepared for the unpredictable.
What Is Included in Working Capital?
The things included in working capital for assets may be inventory, savings, and accounts receivable. These numbers dictate your business’s worth. Don’t forget to account for investments and prepaid expenses. In short, any money you keep or have coming in can count toward your assets.
The things included in working capital for liabilities may be rent, utilities, supplies, taxes, and deferred revenue. You’ll take your assets minus liabilities to get your working capital amount. From there you can adjust and cut costs as needed.
Why Is Working Capital Important?
Knowing your working capital determines how well your ecommerce business is doing. Gather all your assets and liabilities to calculate your number. Remember that this number can change, so keep updated on the changes you see throughout the year. This will give you a better idea of how to handle your budget in the following cycle.
It’s a balancing act to keep enough cashflow for short-term expenses and opportunities, but spread out your money to prepare for the long-term. This is a number that only you can decide when looking at your budget. Where do you want to cut? Where do you want to add extra cash?
How Would Funding Benefit You?
The balancing act of short-term cashflow and long-term working capital can be better managed with funding. With a revolving credit line, you can have constant access to cash in times of need. If you’re looking to expand, then a long-term business funding can get you the equipment you need without sacrificing current cashflow.
There are many funding options available for ecommerce businesses. Banks, alternative lenders, and investors all want a piece of the action. The question is finding a place that works for you and deciding on the type of funding that will benefit your business the most. Consider your budget and how much you’ll need before approaching lenders.