learn what it is, how to calculate it and its importance

What is working capital?

This concept is simpler than it seems, but we assure you that its importance cannot be underestimated. The working capital refers to all the financial resources that the company has available to face short-term debts, that is, those that are no longer than one year old.

Depending on the resources and debts your company has, you will be able to determine the solvency of the business in the event of an unforeseen event or in times of low profitability or high economic volatility.

So, working capital, also known as working capital, is an indication uk email list  of the level of freedom your business has to make new investments or, on the contrary, whether it should be restricted a little until reaching a more stable financial level.

Components of working capital

Now that you know what working capital is, it is necessary  guide to the Spanish Trust to understand what its components are. Essentially, this fund can be obtained from the accounting balance sheet or  balance sheet that you generate for your company. This takes into consideration the two fundamental elements that make up the fund: current assets and current liabilities.

A current asset is an asset that the company has that can be sms to data  converted into cash quickly (in less than 12 months). Current liabilities, on the other hand, correspond to any accounts payable that you have in that same time.

In this sense, the formula for calculating working capital is quite simple:

Working capital = Current assets – Current liabilities 

The difference between assets and liabilities is what clearly indicates a company’s ability to cover its debts in unforeseen times. It should be noted that the calculation can also be made using non-current assets and liabilities, but this is a less common method.

Types of working capital

When calculating working capital, there are only three possible cases depending on the result:

• Positive working capital : This occurs when the difference between assets and liabilities results in a number greater than zero, which indicates that your company has sufficient resources to meet any debt that may arise during the year. This is the most favorable case that can be presented.
• Negative working capital : here we are talking about the opposite case, where liabilities or debts exceed assets, resulting in a negative working capital. This value tells us that the company is at risk of defaulting on its obligations, thus generating short-term financial problems.
• Zero working capital : this fund is generated when assets and liabilities have the same value and cancel each other out, that is, their value is zero. Although having a zero working capital indicates that debts can be settled, the margin of error that the company has in the event of an unforeseen event is very limited, so a strategy must be used to increase financial resources for these situations.

Importance of working capital

Understanding this concept is essential to improve the management of your business. Every company must keep its vision for the future, but without forgetting short-term obligations, and that is where working capital comes in.

Regardless of the size of the company, having a positive bottom line is indicative of good financial health, since it is able to maintain its liquidity and generate confidence in investors.

Imagine then that you have a clothing store that makes a purchase to replenish its stock of products. Generally, a payment period is requested from suppliers, so that the money can be obtained from the sale of the merchandise that is received.

Now, if sales are not as expected, or there is a short period of recession, that is where your working capital comes into play. When the debt is paid off, you will have enough money to cover the payments and avoid insolvency problems with your suppliers.

Working capital can also indicate your business’s ability to grow and expand depending on the economic activity you carry out. This can be seen when the difference between current assets and liabilities is very large, indicating that there are stagnant resources that can be used for new investments and thus reach new markets.