What is working capital?

Working capital is the portion of a company’s economic reserves that is dedicated exclusively to ensuring that the company honors its short-term obligations.

In the accounting environment, it is classified as current assets: it is a set of assets and rights that, due to its high liquidity, allow the company to bear its costs and expenses even if the billing is below what is necessary for this.

Among the main items that make up working capital, we can mention: the values ​​in cash, in banks and in highly liquid financial investments, as well as inventories.

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!

How is working capital calculated?

Defining the amount of working capital intuitively is not easy.

For this, there are some points to note in its definition:

  • Default;
  • The volume of costs and expenses;
  • The average sales volume.

Each of them has the power to decrease working capital when they suffer variations.

The unexpected increase in costs, for example, requires the company to withdraw a portion of the working capital to pay the debts. The same happens in the case of defaulting customers or a drop in sales volume.

Ensuring that this “bailout” is possible is the main objective of working capital.

Therefore, continually assess whether the amount reserved for it meets that need.

Within Accounting, there is also the concept of Net Working Capital (CGL). It is nothing more than the traditional working capital attached to the open possibility of taking loans to compose the reserve.

In general, the formula used to define Net Working Capital is adopted by most managers to define the amount that should be set aside for this fund.

It’s her:

  • Current assets – Current liabilities = Net working capital.

As we have already explained, current assets are the set of all the assets and rights of a company that can be easily transformed into cash.

The current liabilities , in turn, includes all debts that the company should pay off in the next twelve months as taxes and installation bills (water, electricity, internet), for example.

What is working capital for?

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.

However, understand that working capital gains new and greater impact. They are employees, customers, suppliers, creditors … All depending, in large part, on your management and the success of your business.

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