Working Capital Requirements:
Formula & Calculation

Two things that can never change are the volatility of the market and the ever-growing need for capital in your business. We understand that not all businessmen may have convenient deep pockets to aid all of their business needs, from expanding your business geographically or vertically, buying machinery or increasing the workforce. Therefore, Business Loans help provide equal opportunity to all for a better business and a better India! But to get a business loan, you must first understand what working capital requirement is and how it’s calculated!

What is the Working Capital Requirement?

Simply put, the working capital requirement is nothing but the difference between a company’s current assets and current liabilities. In other words, it is the amount that is required to keep the business operations running smoothly. A working capital requirement can thus be a great factor to see a company’s financial health. While a positive working capital requirement shows that a company has enough funds for its current operations, a high working capital requirement is not always a great thing as it may show that a business is not investing its excess cash or may represent an excess inventory. 

The Two Components of the Working Capital Requirement:

There are two parts of calculating working capital: finding out your current assets and your current liabilities. 

1. Computing Your Company’s Current Assets

Computing Your Company’s Current Assets is an easy task! You can include all of the following items in your calculations:

• Physical cash in hand with the company
• Any assets of the company like stocks, land or machinery
• All future expenses paid for in advance
• Any other assets you may have

2. Computing Your Current Liabilities

Computing Your Current Liabilities, may be an emotionally daunting task but it’s a worthwhile one! You may include all or any of the following components that apply to your business scenario:

• Unpaid expenses of the business as of the time of application of loan
• Unpaid loans on the date of application of business loan
• Any other liabilities that may apply to your business 

How to Calculate Working Capital Requirements?

Now that you have the first two figures of current assets and liabilities of your business, subtract the current liabilities from the current assets of your firm, as illustrated by the formula below:

Working Capital Requirement = Current Business Assets - Current Business Liabilities

Let us try to understand this with an example. Suppose you own a business called ABC. And while everything is going great in your business, you see an opportunity that nobody else does, which is a geographic expansion in a neighboring market, where you feel your products would sell in higher quantities or at much better prices creating a profitable margin. Now, you, as the owner of ABC, realize this opportunity and you want to make the most of it, but you realize that ABC cannot afford these expenditures right now. A good mentor of yours suggests a business loan. While computing the current assets, you find out that your current assets are worth INR 50,0000, while your current liabilities are worth INR 20,0000. Subtracting the current liabilities from the current assets, you get an amount of INR 30,0000, which is your working capital requirement.

Conclusion

Using financial tools like a business loan to your avail can help grow your business manifolds. It is all about the timing, the art, and the execution of paying the loan back! Depending on the type of ownership you exercise over the firm, the liability may lie on the business and not you, hence guaranteeing minimum risk for you! Do read all terms and conditions carefully and make the most out of this opportunity!

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