What is Working Capital, and Can it be Used to Pay Salaries?

What is Working Capital, and Can it be Used to Pay Salaries?

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Many small business lending loans are developed because companies need working capital. Having a good flow of cash gives a business the ability to take care of bills as well as pay their worker’s salaries. It is vital that worker’s salaries are covered because without them a business cannot survive. Life happens and it can sometimes hit hard on small business owners. Equipment breaks down, clients do not pay on time and this can all affect the way you handle payroll.

Working Capital

Working capital is designed to help with all business needs. It will help a business owner with all day to day things that their business may be lacking. During this process, the company’s liquidity, efficiency, and overall health will be evaluated.

The working capital will be the result of several things including inventory management, debt management, revenue collection and payments to vendors. It can be calculated by taking the current assets and subtracting current liabilities. Many small business owners may have to get a loan to open a cash flow for their working capital.

Filling the Gap

It is important that small business owners have a way to fill the gap and get their business to where it needs to be. Therefore, it may be necessary to apply for working capital to help cover salaries. A payroll solution can take so much pressure off a business owner, while they are working on getting their business to the point it needs to be. Having money in your account will ensure things run smoothly and current opportunities do not slip away.

Unpaid Salaries

Unpaid salaries are a company’s debt for a period of time. It will be entered as an expense as a debit on the company’s income statement. At this point the business has not withdrawn these funds from their account, it is payment due to workers and must be recorded as such. It will be noted as a credit entry to its accrued salaries account, which is known as the business’s current liabilities on their balance sheet.

Salaries that are unpaid are typically handled in this manner between the company’s books closing and payroll occurring. Unpaid salaries are a part of a company’s working capital because they are a liability causing a decrease in the capital.

Paid Salaries

Once a worker is paid, the salary is cleared. The accountant would record the payment as a credit entry to the cash equivalent account while entering a debit to the accrued salaries account. If all salaries are paid, then the business’s balance sheet would not have a current liability account. Because of this, you can see that salaries do not affect the working capital for any company which has all wages paid.

Working capital can be used to help a business owner pay any outstanding debts, including salary. It is essential that the owner takes time to devise a plan to help pay this capital, otherwise the business will only continue to rack up debt.

 Combining a high level of personalized service with a cutting-edge lending platform, Formula Funding delivers an unparalleled banking alternative. We offer a fast and efficient option to get your business the critical funding it needs without the red tape. We work with all credit grades, tax liens, judgments, and charge-offs – something unheard of at a traditional bank. Since 2010 over 15,000 small business owners have used our funding sources to grow and expand.