Optimizing a company’s productivity is one of the main administrative objectives of any company, regardless of its size. For this reason, periodically evaluating the working capital with which this account is a task of vital importance and responsibility so that in this way, the operations that are generated are balanced and contribute to growth.
So, do you know how many resources your company has to operate? Or how easily can your company meet the commitments to carry out its activities? This blog will tell you what working capital consists of, why it is essential, and how to calculate it.
But first, you should be clear about the following two concepts:
What are current assets?
It is a tangible or intangible asset that a natural person or a company owns. It represents all the assets and rights of a company, acquired in the past and could obtain future benefits.
Assets can be classified as fixed or current, this depending on the ease with which can convert the purchase into money. On the one hand, fixed assets cannot be liquidated in the short term and are generally associated with the company’s operation. On the other hand, currently refers to the help that can use in less than one year to obtain a profit.
What are current liabilities?
They are the debts or financial obligations that a person or company has acquired. For example, payments on a credit card, services or mortgages. But, if we speak from the 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 like this:
Liabilities = Assets – Equity
What is working capital?
It refers to the resources that a company requires to operate, carry out its activities or continue to work; this allows knowing the business balance between the obligations and assets.
We can refer to working capital as the company’s current assets minus its current liabilities. Although 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 face commitments in its daily operation. If you are facing difficulty in calculating working capital than you should consult a company that provides working capital loans.
How to calculate it?
To find out, we must consider two variables: total current assets and total current liabilities. With this in mind, we calculate the difference between said data and thus, we obtain the working capital. The operation would then be:
CT = (Total Current Assets) – (Total Current Liabilities)
Types of working capital
Networking capital
It refers to the amount of money that a company needs to meet all its short-term financial commitments; it is an indicator to manage and know all the payment capabilities of the company.
Own working capital
Indicates the number of the company’s resources. This working capital is related to the behavior of the shareholders’ equity accounts and fixed assets.
The way to calculate it is:
CTP = Current assets – Current liabilities – Long-term liabilities
Long-term liabilities are the debts that a company has which must be paid after the next financial year.
Why is working capital essential for your company?
Being attentive to working capital will allow evaluating the ability of a company to produce cash flow, that is, liquidity. In addition, it will enable you to maneuver assets and liabilities in a balanced way.
It is also important because it is the money that will cover the company’s costs if it invests. There is a shortage of resources to pay basic expenses, or customer payments are made in long instalments. Finally, the working capital will allow the company to solve emergencies.
Remember that working capital is an indicator of the resources your company has. Knowing it, you will see the amount of money necessary for your company to operate and grow.
