Working Capital: What It Is, How It Is Calculated, Working Capital and Cash Flow and Much MORE

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The Working capital It is a financial indicator that is used to determine the resources available to a company to operate efficiently. In this sense, it is of vital importance for the financial health and sustainability of the business.

Within this context, it is a concept of great value in financial matters and of great utility in all existing companies in the world. That is why, below, we will tell you everything you need to know about this concept, cash flow, how to calculate it and much more.

What is Working Capital?

Now then, next we want to talk to you about what is known with the term of Working capital NWC and its relevance to the success of the business. In this sense, it is basically an amount of financial resources that the company needs to continue operating and explore its economic activity.

Said Capital is responsible for maintaining the operations of a company, especially when the receipt of the provisions of sales or services. And, consequently, there is no cash to cover basic expenses. Therefore, it is what provides financial support to the company until its sales are received.

In other words, they are the financial resources applied by the company in the execution of the operating cycle of its products. With the understanding that, they will always be financially recovered at the end of this productive cycle.

Likewise, in order to operate, the company requires resources to meet the needs of inputs, raw materials, labor, replacement of fixed assets, among others. Reason why, these resources must be available in the short term to cover the needs of the company on time.

In summary, working capital is the money you have to run your business or organization on a day-to-day basis. Which implies enough money to purchase merchandise or inventories, investments, payment of salaries, public services, leases, among others.

Working Capital and Cash Flow

In this section we are going to talk to you in very clear and simple terms, about the Working capital and his relationship with him Cash flow. In this regard, it is very interesting to know about this aspect due to the importance of the aforementioned concepts in the management of a company or organization.

In this sense, working capital is directly related to the company’s ability to generate cash flow or cash. In addition, cash or cash flow that the company obtains will be the one in charge of conserving or increasing the working capital.

Therefore, to positively affect working capital, the company must seek to improve its ability to generate cash with less investment. That is why the cash flow generated by the company allows it to operate, replace assets, pay debts and distribute profits to the partners.

Consequently, an efficient generation of resources guarantees the solvency of the company to be able to assume the current commitments. As well as, it allows you to project future investments without the need to resort to financing from partners or third parties.

Similarly, the cash flow of the company or organization must be sufficient to conserve its working capital. Likewise, maintain at levels to replace assets, to meet the costs of liabilities, and to distribute utilities to the partners of the company.

In conclusion, working capital is the money that the company has to function in an ideal way. Which must be sufficient for the acquisition of merchandise or investments, and in turn guarantee the payments of its liabilities.

Net Operating Working Capital

For the aforementioned, you should know everything related to the term of Net Operating Working Capital. Consequently, to explain this aspect in detail, you must be aware that it is made up of a series of concepts that we describe below.

First, we will define Net Working Capital, which refers to the amount you need to meet short-term financial commitments. Also known as net working capital, this concept is used as an indicator to manage and know all the payment capabilities of the business.

It is important to note that cash should not be the main asset in the balance of a company since it does not generate any profitability. Ideally, investing it in an asset that generates some profitability such as inventories, fixed assets, or the payment of liabilities, reducing financial costs.

Within this context, the Net Working Capital is calculated taking into account the Assets Circulating CA or Current and Current Liabilities or CL. It should be noted that both are concepts that working capital and net working capital have in common.

In other words, the Net Operating Working Capital is the sum of inventories and portfolio, less accounts payable. Therefore, the aforementioned indicator can be considered as a financial “slack” that allows the company and its actions to operate efficiently.

It is worth highlighting the concept of own working capital, it is defined as the variable that indicates the amount of own resources of the company. Therefore, it will depend on the behavior of the equity accounts and fixed assets. With this concept, the amount of equity capital of the company that is completing current and long-term assets will be revealed.

Investment Administration

Now, we want you to know everything related to the Investment Administration of Working capital. Which is why, below we detail everything that it implies in a very simple and understandable way.

In this sense, said administration refers to the management of both assets and current liabilities, also called short-term. In this regard, there are several indicators that show the importance attributed to the administration of working capital.

The administration of the investment in working capital is essential to guarantee that the organization has the necessary resources to carry out its activities. That is why, companies must try to have a cash cycle in accordance, in time, with the investment that is made.

In order to achieve a reasonable balance between assets and liabilities in the short term, companies must carry out a series of strategies. We will describe some of the most common strategies below:
  • Diminish the time given to customers to pay their bills, avoiding late payments.
  • Adequacy of financial processes.
  • Debt negotiation, increase the term of the providers.
  • Management inventory, adequate inventory level.
  • Correct management from the treasury.
  • Reduction of costs and expenses.

By following these recommendations, the investment requirements in working capital will be minimal or non-existent, but there are also other aspects that must be considered. Such as, the fact that current liabilities exceed current assets, you could incur a debt for mismanagement related to the business.

Consequently, a deficit in the investment Working capital has a negative impact on the image of the organization or company. Likewise, it reflects that the company faces liquidity problems and is unable to pay costs related to short-term periods.

How can you calculate the working capital?

Before finishing this article, we are going to talk to you about the way in which you can calculate the Working capital. In this regard, you must first define all the expenses and costs of the company, in order to define the minimum working capital to operate.

That is, all the expenses and costs that will occur regardless of whether your company receive or not income in a given period. Such as: electricity, rents, personnel expenses, office supplies, electricity, accounting services, technology, among others.

Now then, once defined everybody the expenses and costs that the company estimates to disburse in a given time. Likewise, on an ongoing basis, it is responsible for estimating what said company considers will enter its cash flow in the same period.

However, it is important to note that this payment must be made in a recurring and guaranteed. In other words, the payment of clients who generally have arrears or are considered delinquent cannot be considered for this calculation. Finally, the Working Capital is the result of the amounts of current assets by those of current liabilities.

So to calculate it, we simply apply the formula: NWC = CA – CL. Therefore, assets and rights that can be converted into cash in the short term constitute current assets. Which refer to cash in hand, investments, accounts receivable, bank deposits, prepaid expenses, etc.

While, current or current liabilities are all obligations that normally must be paid in a year. Within which we have, the loans banking, debts with suppliers, provisions and accounts payable. In summary, we reiterate that working capital is the money you have to run your business.

We hope we have contributed to your knowledge about the Working capital!

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