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Small Business Working CapitalWhat is Working Capital? Not doubt by now you have noticed the phrase 'Small Business Working Capital' a number of times while browsing through this site. Would you like to know what it means? The Usual DefinitionWorking Capital is generally current assets minus current liabilities, and is considered to be a basic measure of the ability of the business to pay its current obligations. Current assets are those assets held by the business that are able to be easily and quickly converted into cash and include cash holdings, call deposits at a bank, accounts receivable, and inventory. Current liabilities are those debts owed by the business that require payment in the very near future, an example of a current liability is accounts payable. The Generally Accepted Meaning for a Startup BusinessFor a proposed small business, the phrase 'working capital' has a slightly different meaning and relates to the cash you will need for all of your operating expenses that you will need to incur to keep the business open. Under this definition working capital includes all of your ongoing everyday expenditure like replacement inventory, labour and raw materials, rent, salaries, advertising, debt repayments and anything else you intend to spend money on during the startup phase. How Much Working Capital do you Need?I would recommend that you set aside enough working capital for you to keep your new business running for at least three months. But believe me, if you can manage it, six months would be better. The pressure on an under-resourced small business can be intense and in the very early stages of your startup phase you need to be concentrating on building the business, rather than being worried about finding the money to pay the bills. Business decisions made out of desperation rarely work out well!
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