Working capital is one of the most important elements for good business management. However, this is a concept that is not always well understood by entrepreneurs, even those who already have some experience. As a result, problems with payments, lack of resources at critical times and difficulties in paying off debts end up being situations that constantly cause greater risks than necessary.
Do you already know enough about the topic? Follow us and clear up any doubts you may have, as we delve deeper into the subject. Check it out!
What is working capital?
Working capital is the resources that a company needs to ensure the continuity of its operations. In this case, it represents the current assets of the company so that it can cover both its fixed and variable costs .
In practice, it is the sum of all financial resources found in the company’s stock and bank accounts, investments, pending payments from customers and everything else that can be converted into cash quickly enough for the company to meet its obligations and continue with its activities if necessary.
And it is precisely because it serves to maintain these activities that the resource has this name. Giro has to do with the financial accounts that rotate, that is, that move the company’s routine.
In a simplified way, we can think of it as follows: when starting its activities, every company receives two types of investments. One is fixed, intended for fixed assets, that is, for the purchase of equipment, furniture, among others. And the other is what will serve to compose a reserve of resources that will be useful according to the financial needs that the company presents during its activities. This part is what we call working capital.
How does it work?
Since working capital is the money that keeps the company running, it is necessary to know the amount needed per period. This makes it much easier for the manager to manage the business. But how do you find out this amount? Simple. Start by properly calculating the monthly fixed costs of your business — amounts such as rent, employee salaries , energy bills, telephone bills, among others, must be considered.
Next, estimate your monthly variable costs. Now is the time to consider expenses related to the sale or production of the product or service offered by the company. Examples of these include raw materials, sales taxes, and more.
With these values in hand, calculate your daily average, arriving at an approximate value of your cost per day. This way, you can organize yourself according to your interests and act to make working capital more convenient for your company.
How to calculate working capital?
A company ‘s net working capital (NWC) depends on several factors. These include sales volume, the cost of each sale, inventory terms, and payment for purchases. Since net working capital is directly linked to cash flow, we can use the following formula:
CGL = AC – PC
In this case, AC represents current assets (financial investments, bills that the company will receive, among others) and PC represents current liabilities (debts with suppliers, accounts payable, loans taken out, among others).
Therefore, in order to be able to calculate working capital correctly, it is essential to maintain a detailed cash flow, as well as to know the company’s funds in detail and define the duration of each resource in order to guarantee its constant replacement.
Also pay attention to cash flow tools and good practices, so that cash management is truly useful for calculating working capital, facilitating procedures.
What is working capital for?
There are numerous reasons that justify proper financial control by companies and, consequently, the need to have an exact idea of their working capital.
When this happens, it is possible not only to know when is the ideal time to make purchases and how to better deal with deadlines, but also to keep asset and liability accounts in balance, meet the needs of carrying out operational activities and grow in a sustainable manner.
Working capital is the tool that can guarantee your company the conditions to always pay its bills on time and maintain a positive cash flow.
It is, therefore, a resource that allows entrepreneurs to make their business management more rational, and it is also a useful tool for negotiating new investments with partners. When there is a constant or high working capital, the company tends to present a diagnosis of good financial health, which can be valued in negotiations.
Why is working capital important?
In practice, what working capital offers as its greatest benefit is that it gives the manager parameters so that he knows how much the company has to fulfill its obligations in order to maintain operations.
In this case, companies that usually operate with low working capital run a greater financial risk, since when faced with eventualities such as recession, unexpected expenses and the emergence of market threats, they have fewer resources to deal with the problem. It is important to remember that, in times of crisis , working capital is usually severely compromised. Therefore, special care is needed with this issue from the start of the business.
In cases where companies operate with high working capital, risks become smaller and security against threats proves to be a differentiator in favor of business growth.
In short, working capital is the amount of money a company needs to make its business happen. In other words, it is directly linked to the financial health of the business, which makes its calculation essential for the manager to be able to maintain a high flow of cash.