There are many ways to get an accurate picture of the financial status of your company, and if you'd like to see your firm's ability to settle short-term debts quickly, then it's a good idea to take a look at your working capital.

Many financial terms are applied to the inner workings of your company and these are given values, while also being compared and contrasted to give you a realistic impression of your company's accounts. If you were to take your current assets and subtract your current liabilities, you'd be left with your working capital.

To get this figure, you'd add together the value of your stock, the cash your business owns, the funds owed to you by clients, profits from any work currently being carried out and your short term investments and pre-payments. Then you'd take away current liabilities which include the money you owe to suppliers, any short-term debts, loans, overdrafts, as well as income tax and national insurance payments.

Advantages of managing working capital

These figures can be changed into ratios, for example if your current assets equal £60,000 and your liabilities total £30,000 then your current ratio is 2:1. This helps you see how easy or difficult it is to manage short term financial obligations, meaning you're able to take action should these two figures become too closely matched. Another use for these figures is to impress on other companies and share holders how much working capital you have.

At times the figures may reflect that a lot of your company's assets are tied up in stock and accounts receivable, which is money owed to you by clients. Careful management of your working capital means you'll be able to easily finance your short-term obligations and it's a good idea to see where you can exercise your control over these kinds of systems to boost liquidity, should you ever need instant access to money held in your organisation.

Management techniques

As mentioned previously, ratios are a great way to understand the financial aspects of your firm. Described above is the current ratio, but you can also calculate a 'quick ratio'. These figures result from an almost identical equation - current liabilities minus current assets - except that the inventory is removed from the current assets, as stock is not always shifted in the time you might need to free up cash quickly. A major way of positively affecting your company is to make changes that favourably alter these ratios.

For example, you could choose to take some of the cash in your company and pay off a debt. If you're current assets are £60,000 (with £30,000 cash) and liabilities £30,000, you could use £15,000 to pay off a debt, resulting in a current ratio of 3:1 (£45,000: £15,000), which may be more positively looked on by share holders and clients. Another management technique is to alter the types of loan that you have. As these ratios only look at short-term assets and liabilities, long-term debts are not included, but short-term money debts are.

To improve this ratio you may like to borrow money over a longer length of time, but use it to pay off what you owe in the short-term. You may also get the benefit of low interest rates and current ratios will be boosted. Another way of improving your liquidity is to make adjustments to the accounts receivable and those payable.

If possible, you may be able to record those orders that requirement payment (receivable) earlier into your accounts to increase ratios, or perhaps slightly delay purchases so they are included in later balance sheets. Another tip is to reduce your inventories and stock as these may not be liquidated as quickly as other kinds of assets. Good planning and customer research to see what's likely to prove popular may help to limit the amount you spend on goods that could be hard to shift.