What Is A Net Working Capital And Why Is It Important?

StrategyDriven Managing Your Finances Article |Net Working Capital|What Is A Net Working Capital And Why Is It Important?Many, if not most, businesses need money to develop, survive, and grow. Organizations need the right amount of cash to meet both short-term and long-term needs without high risks of ruining their businesses. Thus, a stable and sufficient net working capital should exist within these companies’ financial accounts.

Net Working Capital: A Brief Overview

Perhaps the simplest definition of net working capital is money that a business has in its bank account. It’s also the measurement of the liquidity, efficiency of operations, and overall financial health of a business entity. Therefore, if a business possesses a working capital of good standing, it can grow through various investments.

Note that it’s possible to grow the net working capital through various means. Organizations can produce additional sales, build long-term relationships with clients, and develop products and services. It’s also possible to acquire additional working capital by borrowing the cash from reliable lending corporations.

Having a lender loan the cash you need to start and maintain projects might help your company grow. You can use the acquired money to purchase equipment to streamline processes or hire additional workers to finish tasks quickly.

Calculating Net Working Capital

Always keep in mind that money is a finite resource. Hence, it would be best to learn how to calculate working capital to let you know the amount of money needed to develop, sustain, or grow business operations.

Don’t worry, as it’s not severely challenging to calculate your company’s working capital. It’s as straightforward as subtracting your business’ current liabilities from its current assets.
Your firm’s current assets may include (but not limited to) the following:

  • Current inventory
  • Cash and cash equivalent
  • Accounts receivables
  • Prepaid expenses
  • Marketable investments and securities
  • Other liquid assets

As for your current liabilities, these may include the following:

  • Accounts payables
  • Taxes
  • Accumulated expenses
  • Interest payables
  • Short-term loans

For example, a small business wants to calculate its net working capital and compiles all the data required to acquire this figure. After gathering all the necessary receipts, documents, and files, the company might find its current assets at USD$100,000. They then need to collect and calculate payables, such as taxes, loans, and other expenses. Now, it finds that the business has USD$45,000 in current liabilities. Using the formula of subtracting current liabilities from current assets, the net working capital is USD$55,000. Hence, the company could use this amount to cover operational costs and meet other short-term obligations.

It’s highly recommended for entrepreneurs to know how to calculate their company’s net working capital. The ability to be aware of your business’ income sources helps you check whether you have a steady income source to thrive and survive.

Importance Of Net Working Capital

Without a sufficient amount in one’s net working capital could lead to mild or serious issues. Avoid these concerns by looking at the various reasons why a working capital is essential in developing and maintaining a business.

  • Maintain Smooth Operations

Maintaining smooth business operations is crucial to the profitability of relatively any company. A successful business thrives on providing products or services that people want to purchase.

Providing your business with a stable and sufficient working capital helps the organization maintain smooth operations. Otherwise, you might encounter certain problems, such as the lack of funds to provide workers’ salaries.
If this scenario happens, it could lead to more serious risks. Your employees might go on strike and may not return to their working stations until you provide them with their just financial compensations.

Another problem you might run into is the lack of stable finances to continue producing goods for customers. If your sales representative tells your customers that you don’t have enough stocks for a particular item, you’re going to lose valuable sales. Furthermore, customers might opt to purchase from your competitors instead, and this scenario accounts for lost short-term and long-term sales opportunities.

  • Improve Company Earnings And Profitability

Many small businesses don’t have the financial resources available to sustain their operations and make them grow, unlike large corporations. Therefore, it might be tough to create a profit without knowing and possessing financial stability in the business’s net working capital.
If so, begin by asking yourself how you plan to handle your working capital. Using the formula mentioned above would calculate your company’s net working capital to know the budget for your short-term and long-term projects. In turn, you can figure out the company’s earning potentials and maintain profitability to access eventual growth opportunities.

  • Minimize Costs While Maximizing Returns

Knowing your company’s net working capital also helps you minimize costs while maximizing revenue potentials. It’s because knowing the figure in that aspect enables you to balance various benefits versus the costs.

For example, you might find that your organization is holding high inventory levels. Note that several benefits may come from having plenty of stock to offer to clients. That idea might not always be the most efficient solution, especially for startups and small businesses.
Excess inventory will take up valuable storage space. Hence, your company may not have enough room for other products, unless you’re willing to spend extra cash for additional storage. Furthermore, you need to add the costs of financing and insuring the inventory in case of losses. In turn, the excess stocks may lead to more costs for your organization if you can’t dispose of them soon.

It’s possible to figure out the right number of products needed for your business’ storage while satiating the needs of your loyal customers without spending too much of the company’s financial assets. You could achieve the answer to this particular concern by calculating your business’s net working capital.

  • Helps Identify And Solve Efficiency Issues

When your company has problems with the flow of funds, it might be because you may have too little money for your accounts receivables. But you might not know about this issue if you don’t know how to calculate for your firm’s net working capital.

In turn, you can identify and solve efficiency issues in your business. Identifying your organization’s working capital allows you to look at where your money is coming from and where it’s going. Thus, you can formulate plans to solve productivity issues to increase the business’ cash flow.


A company’s net working capital helps meet its short-term goals, which might lead to long-term solutions. Calculating the working capital and understanding its importance allows entrepreneurs to develop actionable strategies and implement projects based on their spending power.

Operation Getting More Value In Business

As a business, providing customers with value for money. However, you mustn’t forget to ensure that your spending generates the best results too. Making your capital work harder will lift a great weight from your shoulders while also enabling you to pass some of the savings onto your clients.

So, how exactly can you ensure that all decisions are made in the best interests of your customers? Here’s all you need to know.

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Assemble The Strongest Possible Team

The majority of business matters will be handled by your employees. Therefore, getting the recruitment process under control should be the first item on your agenda. This should be followed by an ongoing investment into their development both individually and as a team. The best ways to achieve this are through training and team building exercises. When they work harder, you’ll get more value for money on a daily basis. There is no stronger foundation for success.

Keep Assets In Good Health

Taking care of your business assets will unlock greater performance levels and prolong the lifespans. Keeping business vehicles in good health with the right gas oil is a significant step in the right direction. Meanwhile, computer system updates should bring telling results too. Even though the daily maintenance can have a very significant impact, you must learn to spot signs of faults. The sooner you act, the sooner you’ll restore their health. This should save a lot of money in the long run.

Research Your Purchases

You already know that customers want to get the best value for money when buying products or services. You should take a similar approach before completing your transactions. Simple ideas like using price comparison sites can work wonders. Likewise, you’ll want to check that any company you plan to do with business can be trusted. Falling victim of fraudulent activity or inadequate supplies will harm the venture and could be very hard to recover from. It’s best to be safe rather than sorry.

Know Your Demographic

Marketing is an area where only the best will do. Efficient marketing should be built around targeting a key audience. It’s impossible to impress everyone, but smarter research and insights will allow you to focus on the people that are likely to purchase. SEO, PPC, trade show stools, printed materials, and social media marketing can all be used to great effect. Remember to analyse the success of every campaign and make the necessary adjustments for ongoing success.

Avoid Bad Debts

While you obviously want to get as many sales as possible, you must not force thing when dealing with repayment plans. Good sales figures count for nothing if the money never arrives. Understanding bad debts and how to avoid falling victim to them is vital. While some people will default on payments, but you don’t want to let this become a major problem. Protect yourself in this manner, and your hopes of maintaining a positive cash flow will be greatly increased.

When the financial elements are under control, you can focus on actively driving the venture in the right direction.

Get That Business Budget Down

StrategyDriven Budget Management Article |Budget|Get That Business Budget DownHaving a business budget is something that most businesses actually ignore. They know there’s a margin to stay close to, but there’s not really a definitive figure that they have to try and meet. So it’s so easy for the budget to get completely out of control, leading to stress and financial turmoil along the way. It’s one of the main reasons why so many businesses go into administration, even those that you think will go on forever. And it all starts with basic budget management that so many businesses seem to be ignoring. So, we’re going to try and help you out, and see if we can get your business budget down. There will no doubt be so many different areas that you need to work on and make some cuts to, and it won’t mean that quality is reduced either. Half of the time, businesses are cautious as to cutting a budget, because it can often mean a knock on effect. But we’re going to avoid all of that, and give you some simple tips that should help you to get that budget down.

Your Office Budget

So there will be multiple different things that you’ll have purchased for your office over the years, that will now be helping to make your business run as a well oiled machine. Technology is the main part in that, then your employees. So with technology, it’s definitely easy for it to drain your budget each month, simply because it’s harder to manage. It might be so much cheaper for you to visit websites such as, and see if you could benefit from using some of their services. By outsourcing your IT management, you’re not only going to save your business money in the long run, but you’ll be doing it by saving some man power. From software updates to server management, there are companies who will do it for you all in the background!

When Marketing Starts To Add Up

Marketing is one of the biggest budgets that a business seems to have, especially as it begins to grow and evolve. There becomes more of a need to market new products and services, and to keep your business in the race. But when a marketing bill starts to add up, it really does add up. So rather than outsourcing everything you do, simply because you don’t understand it, think about keeping some of it inhouse. The more you understand marketing, the easier it will be to actually manage it in house, and even do it more effectively than if it was to be outsourced.

The Areas You Want To Avoid

There are definitely some areas that you want to try and avoid cuts, and that’s with your employee wages and benefits. So many companies don’t get their employees to sign a contract, and they then use this as a way of being able to cut pay. But the last thing your company should want, is a bad reputation based around employees and the management of them, so always avoid this area when making cuts!

Geting to Grips With Your New Business’s Finances

Starting a new business can be challenging, especially if you don’t have any financial training or experience. Your company will grow with wise financial choices and decisions, and there’ll be little room for error, especially in the first tentative months. However, this does not mean that you can’t do a little research and ensure that you seek the right advice so that your startup can begin to thrive, and you’ll become financially savvy as you evolve with your company. Therefore, it’s worth taking some time and making an effort to better understand your income and expenses. You’ll also need to work on where you’re you’re going to invest, save, and improve regarding your cash flow.

The more knowledge and understanding you possess surrounding your business finances, the more clarity you’ll have when it comes to important decision making and spending. It can be a challenge to gain the interest of other investors and those who will help you to take your business to the next level, especially when you’re a small fish in a big pond. Therefore, you must get the basics right regarding your money so that your success and reputation can proceed you in a meeting or networking event. The following are some ideas, inspiration, and advice for those who need a confidence boost regarding their business and its finances.

Get Yourself A Great Rating

When you’re trying to be careful with your funds, and save wherever you can; you might think that getting yourself a credit card might be a bad idea. However, it’s worth getting one so that you’ll have a credit rating or score for you and your business. Without a credit score, it can be difficult to gain investment or receive a loan, and you’ll probably need these at some point to invest further in your company. Take a look at the discover it review so that you can better understand how a credit card could work in the favor of your business. Alongside having a great credit rating; you’ll be able to receive rewards and even cash back on certain things when you use the card to spend, so it’s well worth looking into. As long as you’re prepared and able to pay your monthly bills back on time; there’s no reason a credit card and its resulting score, won’t be beneficial to your company.

Get Yourself Some Professional Advice

In order to ensure that you’re making the right choices regarding your money; you’ll to invest in expert help and advice. Hiring a reputable and qualified accountant to look over your finances, and advise you on what to do with your spending and saving, will give you the peace of mind that you’re making the right decisions for your business. They will be able to help you understand your monthly figures and targets, and they can suggest budgeting tools for when they’re not there; investing early on in expert advice will make sure that you reap the rewards further down the line.

Turning The Tables On Your Failing Business

The sad fact of the matter is that no business is guaranteed long-term success. Statistics show that at one point or another, most entrepreneurs will be faced with the task to reviving their dying business. So if your business is failing, don’t worry because you’re not alone. At one point or another, most businesses will have a ‘near death experience’.

Often, these difficult periods are caused by bad business conditions such as low sales, a lack of morale, low funds, and the loss of innovation and dedication. Some businesses are able to bounce back from being in this slump and are stronger and more successful because of it. While other businesses don’t quite manage to get back on top and end up closing their doors for good.

Although it can be hard to bring your business back from the brink of death, it is possible; it’s just a case of knowing what steps to take, that’s all. To make the process of reviving your business a little easier, below are some tips and pieces of advice to take note of and implement.

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Re-evaluate the situation

To fix a problem, you need to determine the cause. What this means for your business is that you need to re-evaluate things and try to work out what the exact cause is of your business problems, if you don’t already know, that is. To make determining what the problem is easier, here are some areas to focus on: strategy, customers, team members, products/services, and finance. Take your strategy, for instance, ask yourself whether your company has a direction – does it have goals to meet? Look at whether your business is focused on the right things or if it might be time to slightly alter your direction. Re-evaluating your business situation is easier than you would think, it just takes some time, that’s all. Don’t rush the process, take things slowly and work through each area of your business, determining what needs to be changed.

Focus on finance

The fact is that to bring your business back to life; you will need money. If the reason your venture is struggling is because of a lack of funds, the need for more money can make it seem like it’s impossible to breathe new life into your business. However, there are a range of options that you can consider, so even if money is an issue, it’s not the end of the world. Perhaps you could look into getting a loan – you could find out about business lending and see what options you have. Or, if this isn’t doable, maybe you could consider teaming up with a financier and making them a partner in your business.The fact is that money makes the world go around, and without it, it can be almost impossible to successfully run a business, which is why it’s important to look into your options, to ensure that you give your business every chance of success.

Adapt your business

To get your business back on track, the fact is that you are going to need to adapt it. If you attempt to run it in the same way that you were before, it will fail – that’s a fact. So what you need to do is look at how you will adapt your business to ensure that it’s more successful this time around. You need to create a game-plan that will allow you to turn the tables on your business and make a success of it. The things to look at include your purpose as a business, your vision and goals, your values, and your branding. What you need to do is work out what changes you need to make to ensure that your company is successful this time around. Don’t rush this process, take your time. You may also find it helpful to get an objective opinion on things – for this, working with a business consultant can be useful. As by doing so, you will gain an objective overview of your business and what changes you need to make to ensure that it’s successful.

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If you want to make a success of things, you need to be willing to rebrand. The saying ‘out with the old and in with the new’ is apt for this occasion, as you need to change up your business to ensure that the old problems don’t come back to haunt you. When a brand fails, often customers lose trust in the brand, and so, it’s worth rebranding by changing your business’s name and making other small changes, to demonstrate to your customers that it’s a “new” business and one that is going to be highly successful. All your company needs is a face lift and a new identity, and you should be able to make a success of it. If you’re stuck for ideas when it comes to your rebranding or marketing, it could be worth calling in the experts. If you’re not sure how to make changes and ensure that your marketing and branding are both spot on, invest in help. If it means your business will have a higher chance of success, it’s worth the cost.

Get your motivation and passion back

Have you lost the motivation and passion that you had for your business and products or services? If the answer is yes, then you need to do something about it. The fact is that you cannot effectively run a business without motivation and passion. If you are going to make a success of your venture this time around, you need to be motivated to work hard and should have passion for the products or services that you are providing, and so should your team members. The best way to get your passion back and keep yourself motivated is to goal plan and understand just how much potential your business has for success. Get excited about your venture, and you will find yourself raring to go, just like when you first started out.

There you have it, a guide to turning the tables on your failing business. Take note, and you can ensure that your venture is a success, even if right now it’s not doing very well.