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As part of operating assets, working capital represents the difference between current assets and current liabilities, such as accounts payable and accrued liabilities. It describes how liquid a company is.
To determine the amount of working capital, entrepreneurs must carry out a valuation of current assets. From the determined value, they subtract current liabilities. The goal is to achieve a positive working capital value.
To increase cash, founders can use a working capital business loan, a working capital credit, or alternative working capital financing such as re:cap's recurring revenue financing.
With re:cap, we were able to get non-dilutive funding at an early stage which is great for every startup founder. The whole process was simple and fast, and we look forward to a long-term partnership in building Meisterwerk.
CEO and Co-Founder, Meisterwerk
While validating funding options to accelerate our growth we came across re:cap’s financing line and quickly realized it’s exactly what we needed: full flexibility and full control at attractive conditions. The process was transparent and fast (days, not months) which allowed us to focus on our core business.
re:cap has enabled us to get access to funding in an incredibly fast and transparent process. Also, I really like the business insights dashboard which helps us to understand and improve our funding terms. I would recommend every founder to look into re:cap as a financing partner.
CEO and Co-Founder, awork
For us as a company with recurring revenues from offering both hardware and software-as-a-service, re:cap's financing option is a great tool for cash flow management. In addition to that, the financing process was quick and uncomplicated.
CBDO and Co-Founder, ampere.cloud
Having re:cap as a financing partner has allowed us to grow faster without endangering our cash. We are using the funds to cover sales commissions and are excited to use re:cap in the future to grow flexibly in other areas too.
Executive Partner, Tabtool
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Net working capital is also called net current assets and answers the question of which part of a company's assets is used to generate short-term revenue. It includes cash and cash equivalents, resulting in the following calculation: current assets - cash and cash equivalents - current liabilities = net working capital.
The terms 'working capital' and 'liquidity' should not be used interchangeably. There is a connection; however, working capital acts as a measure of (potential) liquidity and tells us how solvent companies are.
A conceptual distinction from current assets is important because current assets only cover the asset side - for working capital, the liability side of the balance sheet is also relevant.
Good working capital management is multifaceted. Basically, companies should invoice quickly and collect payments consistently. To maintain a positive value, working capital financing is also a good option - especially for growing companies, which thus expand their room for maneuver.
However, the value should not be too high because that would indicate an unfavorable use of working capital and too much tied-up cash. To lower it, companies can, for example, reduce their own inventories or negotiate a deferral of payment with suppliers.
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Generally, working capital aims to optimize cash flow. Typical examples of working capital are: Personnel, Marketing, Sales, Inventory, and Research.
To calculate working capital, current liabilities are subtracted from current assets. The formula is therefore: current assets - current liabilities = working capital. Here, current means liquidatable within one year.
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Working capital is also called operating working capital. It is the difference between current assets and current liabilities and, as a balance sheet ratio, provides information on companies' capital stock and financial strength.
The working capital figure shows which funds are tied up in regular company operations - it can also be used to determine whether working capital financing is necessary.
A positive value shows that current assets can cover current liabilities - this is important in terms of the golden rule of the balance sheet. A negative value conveys a risk, because affected companies are considered to be illiquid. This can lead to financial bottlenecks.
The question of working capital levels is answered differently depending on the company or business model - especially across industries. However, working capital levels that are too high often indicate that working capital is being used less wisely and that too much cash is being tied up.
In business management, working capital is usually indirect and long-term goods that companies need for their products and services. A distinction is made between tangible resources, such as warehouse and office space, and intangible ones, such as licenses.
Working capital financing allows companies to increase their working capital and generate positive value. It provides them with short-term cash to pay liabilities or make investments.
Working capital financing is multifaceted. Depending on the industry and business model, various types may therefore be considered, such as drawing on the credit line, receivables credit, factoring, and inventory lending. Increasingly popular are alternative solutions such as non-dilutive and non-restrictive sales-based financing.