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Your working capital is used to pay short-term obligations such as your accounts
payable and buying inventory. If your working capital dips too low, you risk running
out of cash. Even very profitable businesses can run into trouble if they lose the
ability to meet their short-term obligations. The calculator assists you in determining
working capital needs for the next year.
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Definitions
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- Annual growth
- The percent of growth you expect over the next year.
- Total current assets
- This is any cash or asset that can be quickly turned
into cash. This includes prepaid expenses, accounts receivable, most securities
and your inventory.
- Total current liabilities
- This is a liability in the immediate future.
This includes wages, taxes, and accounts payable.
- Current ratio
- Current Assets divided by current liabilities. Your current
ratio helps you determine if you have enough working capital to meet your short-term
financial obligations. A general rule of thumb is to have a current ratio of 2.0.
Although this will vary by business and industry, a number above two may indicate
a poor use of capital. A current ratio under two may indicate an inability to pay
current financial obligations with a measure of safety.
- Working capital
- Working capital is used by lenders to help gauge the ability
for a company to weather difficult financial periods. Working capital is calculated
by subtracting current liabilities from current assets. Due to differences in businesses
and the fact that working capital is not a ratio but an absolute amount, it is difficult
to predict what the ideal amount of working capital would be for your business.
To calculate working capital requirements this calculator uses the "Current Ratio"
to determine a target amount of working capital. See the "Current Ratio" definition
for more information.
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Information and interactive calculators are made available
to you as self-help tools for your independent use and are not intended to provide
investment advice. We can not and do not guarantee their applicability or accuracy
in regards to your individual circumstances. All examples are hypothetical and are
for illustrative purposes. We encourage you to seek personalized advice from qualified
professionals regarding all personal finance issues.
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