Steps to Growth Capital Self-Study GuideStep 1

1.5 Determine Working Capital Requirements

Let's take a look at how you can figure out your working capital requirements.

• Read how it's done
  
• See an example
  
• Check your understanding with this exercise

How Working Capital Needs Are Determined

To figure out how much you'll need to fund business growth, consider the four key areas in the financial needs equation:

Let's look at the first of these four important components — your working capital requirements. Working capital is the amount you need to pay for the day-to-day operating costs of your business. It consists of:

• either cash or near cash accounts that can be converted into cash within the current fiscal year (current assets such as accounts receivable and inventories); and
• financial obligations that will have to be paid within the current operating year (current liabilities such as accounts payable).

To determine working capital requirements for your investment proposal, you build projections for these items (accounts receivable, inventories, accounts payable). Then you compare your actual amounts to the figures you've forecasted. The increase in current liabilities (e.g. accounts payable) is then subtracted from the increase in current assets (e.g. accounts receivable and inventories). The difference — or change in working capital — represents the amount of money you'll need.

Besides accounts receivable, accounts payable, and inventory, there are other working capital accounts that may enter into the equation. These include sources of funds that reduce the need for working capital (bank and other loans) and uses of funds that require working capital (marketable securities, prepaid expenses, other assets, supplies and accruals). In this case, the equation becomes:

An Example: New Tech's Working Capital

Check Your Understanding

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