Optimizing the productivity of a company is one of the main administrative objectives of any company, regardless of its size. Therefore, periodically evaluating the working capital is a task of vital importance so that the operations are balanced and contribute to growth.
Do you know how many resources your company has for operations? Or how easily your company can meet the commitments to carry out its activities? In this article, we will tell you what working capital consists of, why it is important, and how to calculate it.
But first, you should be clear about the following two concepts:
What are the current assets?
An asset is a tangible or intangible item that a person or a company owns. It represents all the assets and rights of a company acquired in the past, and with which future benefits could be obtained.
Assets can be classified into fixed or current, depending on the ease with which the asset can be converted into money. On the one hand, fixed assets are those that cannot be liquidated in the short term and are generally associated with the operation of the company. On the other hand, working capital refers to assets that can be used in less than a year to obtain a profit.
What are the current liabilities?
They are the debts or financial obligations that a person or company has acquired—for example, credit card fees, services, or mortgages. But, if we speak from an accounting point of view, we can define it as the debts and obligations with which a company finances its activity and serves to pay its assets.
We can calculate the liabilities with this formula:
Liabilities = Assets – Net equity
What is working capital?
Working capital refers to the resources that a company requires to be able to operate, fulfill its activities, or continue operating. This allows knowing the business balance between the obligations and their assets.
We can refer to working capital as the current assets of the company less its current liabilities. By carrying out this process, we determine how many resources the company has to operate. This sum gives us an idea of the ease with which a particular company can honor commitments in its daily operation.
How to calculate working capital?
To calculate working capital, we must consider two variables: total current assets and total current liabilities. We then calculate the difference between these data to obtain the working capital. The formula to use is:
WC = (Total Current Assets) – (Total Current Liabilities)
Types of working capital
Net working capital
Refers to the amount of money a company needs to fulfill all of its short-term financial commitments. It is an indicator for managing all the payment capabilities of the company.
Own working capital
Indicates the amount of the company’s own resources. This working capital is related to the behavior of the shareholders’ equity accounts and of fixed assets.
The formula for calculating:
Net Working Capital = Current assets – Current liabilities – Long-term liabilities
Long-term liabilities are the debts that a company has which must be settled after the following financial year.
How to finance working capital?
At times, business owners can find themselves in situations where they aren’t able to finance day-to-day expenses. In this situation, companies like Affinity Beyond Capital make acquiring a short-term loan simple. Affinity Beyond Capital is a strategic financial partner in the startup and small business industry, which contributes to major part of United States’ GDP.
Why is working capital important?
Working capital is a tool for evaluating a company’s ability to produce cash flow, that is, liquidity. In addition, understanding working capital allows you to maneuver assets and liabilities in a balanced way.
Having sufficient working capital allows a company to solve emergency situations. It is also an indicator of your company’s available resources. With a clear understanding of working capital, you will know the amount of money necessary for your company to operate and grow in a healthy way.