Working capital, also known as net working capital, is a statement of the amount of money in reserve that the company has to invest in its activities.
As the organization has debts receivable from customers and payable to suppliers, with different terms, it may be necessary, for example, to borrow money to make up the difference. When this happens, more cash will be needed.
In addition to these, there are also other components that the company needs resources to finance and continue to operate as normal, as with inventories.
These elements are known as current assets, that is, assets and rights that are traded over a period of one year, such as accounts receivable from customers.
In the same way, the company has current liabilities, which are obligations to be paid within one year. The most common example is debts to suppliers, of raw materials or goods.
How to calculate working capital
To calculate the value of working capital, it is necessary to know the resources that the company has as current assets and liabilities, discovering the net value through the formula:
Working Capital Formula
CCL = Current Assets – Current Liabilities
As current assets, as an example:
- Cash or bank money;
- Bills to receive;
- Stocks of goods or raw materials;
- Financial and similar investments.
And current liabilities, as an example:
- Accounts payable (salaries, etc.);
- Loans obtained.
This value represents the amount available for the investor to analyze his company’s position and the financial resources he has available.
Considering a company with US $ 120 thousand in current assets and US $ 90 thousand in current liabilities, it will have available US $ 30 thousand in working capital.
On the other hand, if the liabilities are US $ 130 thousand, the company will need US $ 10 thousand to replace the working capital. In this case, you can apply for a long-term loan with the bank while reorganizing your finances.
Need for working capital
Since the beginning of the creation of the company, when the first capital is invested, part is destined to fixed assets, such as machinery, furniture, real estate. The other part of the money serves as a reserve for activities, forming working capital.
As your purchase, production or sale flows, this available value changes, and there is a minimum that this can achieve without damaging the business. Being below it will be necessary to make cash available.
Many organizations, mainly production companies, make cash outflows even before they sell their products and receive their revenues. When this happens, there is a positive working capital (NCG) need.
Otherwise, when companies are able to receive in advance or on very short terms, they have a negative NCG.