If you’re putting a business venture together, including seeking financing, one of the first questions you’ll be asked is the status of your working capital.

This is an opportunity to show a potential lender that not only do you know what this term means but that you know how to calculate this. It’s actually a fairly simple formula: take your current assets and subtract current liabilities.

As you pay off your short-term debts, you’ll see what assets you have available for operations and other costs. This figure is important for planning budgets, estimating cash flow and projecting future growth and future bills.

Figuring out working capital can be useful for your business plan so you can gauge how much you’ll need to make each month to take care of your fixed costs, how much you’ll have remaining, and how much you might need to borrow.

Working capital isn’t necessarily a hard cost that stays the same. If you have more sales in a given month, you’ll have more cash on hand to spend on the company but likely the same fixed liabilities, such as rent, loan payments, or other expenses.

Working capital can generally be thought of as positive especially if there’s enough liquid assets available to pay off short-term debt and improve the company overall. This reduces the need to keep paying interest or even borrowing more.

A company with negative working capital may be in a difficult scenario where they don’t have a lot extra available after liabilities are met, or worse, not even enough to pay their liabilities. This can create situations where more borrowing may be needed, or payments may be late or need to be re-negotiated.

In some cases, a negative situation might be unavoidable on a temporary basis. You may not have a lot of capital on hand at any particular time while you wait for the payment to come in, or you have solid enough of a reputation with your vendors and suppliers so they won’t be bothered if things need to stretch slightly.

For more financial strategies visit Increase Lending.