When you decide to begin a new business which is the extension of your existing small business, you need to keep some factors in your mind. This type of business should be formulated with the basic financial tools and their minor components. One important factor is Working Capital. When you plan to grow your business how much additional capital you require will be a question you may have. This is simple and easy when you just follow few steps.
- You have to understand the working capital cycle of your business. This means how fast your assets can be changed to cash and how soon the liabilities can be paid off.
- Know the amount of accounts receivables, inventory, and account payable.
- You need to know the historical rates of working capital to forecast the future needs of your business.
- Analysis of balance sheet and income statement.
- Make a table and find out the annual turnover ratios pertaining to inventory, accounts receivables and accounts payable.
- Calculation of your new working capital needs.
- Then calculate the projected working capital needs.
- Calculate the increase from the historical working capital.
- Finally, calculate the additional working capital needs.
These are the steps which are followed and calculated for finding the required working capital for a business extension. These are done with the important ratios and also with the components like inventory, accounts payable and account receivable.
Ultimately it all decides how we will be able to handle the immediate cash requirements for the overall business development.
Therefore to accomplish this task of finding the working capital needs of any business a proper business strategy should be formulated which is called as working capital management. This is a part of managerial accounting concepts which is dealt by the senior management professionals of a company. They find out the capability of the balance between the current assets and current liabilities and their liquidity status.
This Working capital management is by following some methods such an inventory analysis, ratio analysis, and operating expenses calculation. All these help in the proper and easy calculation of the working capital requirements of a business.
A good working capital balance aims at smooth functioning of a company from all angles and easy sustainability of the business for a long term.