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FAQs About Working Capital

How does working capital affect cash flow?
Working capital and cash flow are tied. But the impacts of working capital on cash flow can vary. For example, let’s say that a company sells a fixed asset. In that case, both cash flow and working capital would increase. However, if a company purchases inventory in cash, then working capital wouldn’t change because both inventory and cash are considered current assets.
What is good working capital?
The right amount of working capital varies based on the company’s situation. But in general, a positive working capital is a good place to start.
Is negative working capital bad?
Typically, negative working capital is considered a bad thing. That’s because the business doesn’t have enough capital to meet its short-term obligations.

But in some situations, negative working capital isn’t all that bad. If managed effectively, negative working capital could allow you to fund your business by harnessing the power of other people’s money. You’ll need to maintain tight control on the purse strings if attempting to stay afloat with negative working capital.
What businesses have large working capital requirements?
Not all businesses are created the same. Some businesses, like those in the retail industry, require larger amounts of working capital. But lean startups might not require nearly as much working capital.
What’s the difference between working capital and net working capital?
Working capital is sometimes referred to as net working capital. But net working capital can be used to look at a longer time horizon. By taking a long-term look at a company’s finances, net working capital is a valuable metric.
What is working capital management?
Working capital management is an optimized strategy for companies. Typically, this strategy involves a deep look at its current assets and liabilities. The goal is to ensure the most efficient operations.
How do you get a working capital business loan?
Traditional banks and online lenders both offer working capital business loans. Be prepared to provide extensive financial information about your business in the application. If approved, the new loan will increase your working capital and your debt obligations.

Conclusion

Small business owners can use their understanding of working capital to their advantage. If you want to improve your small business's working capital, the first thing to do is a complete assessment of your current assets and liabilities. With strategic thinking, you can make business decisions with the goal of prioritizing your working capital.

Now that you understand the meaning of working capital for your business, you might like to read more about the best working capital loans we recommend for small businesses.

About the Author

Sarah Sharkey

Sarah Sharkey

Personal Finance Writer

Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. Sarah enjoys traveling, hiking and reading when she is not writing.

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