What Is Working Capital In Accounting.Working capital refers to the amount of capital a business has available to fund its day-to-day operations and meet its short-term financial obligations. It is a measure of a company’s liquidity and its ability to meet its current liabilities using its current assets.
What Is Working Capital In Accounting.
In accounting, working capital is calculated by subtracting a company’s current liabilities from its current assets. Current assets include cash, accounts receivable, inventory, and other assets that can be converted into cash within one year. Current liabilities include accounts payable, short-term loans, and other obligations that are due within one year.
A positive working capital means that a company has sufficient current assets to meet its short-term obligations, while a negative working capital indicates that a company may have difficulty in meeting its obligations in the near future. Managing working capital effectively is critical for the financial health and sustainability of a business
Companies, especially newly founded ones, should pay special attention to the creation of working capital. In particular, people who find a means of personal work in the enterprise and, like 88% of Brazilian entrepreneurs, use their own resources or family resources to open a business.
Yes, financial health matters – a lot!
The main function of working capital concerns the financial health of companies.
After all, resources are the matrix of corporate work: money comes in through sales, finances the execution of activities (regarding the payment of professionals) and goes out again to pay debts with suppliers.It is essential for the operation of the company, since the service provided or the product delivered are not free – neither to produce nor to distribute.
What working capital does is to ensure that the company follows this cycle positively.
Among some of the advantages of having working capital, in terms of the possibilities it offers, we can mention:
- Inventory maintenance;
- The financing of customers’ term purchases, which can become a competitive differential);
- Prepayment of payments vis-à-vis financial institutions, which generates savings in interest;
- The condition of being a good payer with suppliers, who may even be more receptive to negotiations due to this characteristic.
Working capital follows the same principle as having a personal emergency reserve: staying safe in the face of adverse situations.
