What is working capital and how is it applied to your company?

The working capital is also known as the revolving fund or in many cases as circulating capital, in English it is called Working Capital.

If this is the first time you hear about it and you are the person who will be in charge of these issues in the company, then what is working capital and why it is important to calculate the working capital correctly in a company will be explained below.

The working capital applied in the financial sector refers to all financial resources that the company needs to be able to carry out its activities and projections within a certain period of time. That is, it also works with respect to a measure of the ability of the company to continue developing its daily activities.

If we had to make a precise definition of what working capital is, we could say that it is a ratio that works as a comparison reference for correct financial management in the short term.

One of the main functions it has the working capital is that, if we want to have an accounting control of the company, and maintain adequate financial management, which ensures the long-term future of the company.

This Working Capital takes into account the payments and the next collections and it is convenient to always have it positive.

If you want a better destination for your company and your investments, it is time for you to keep reading.

How to calculate working capital

First of all, we must know what is made up of current assets and current liabilities. In the case of asset Current is made up of the existence of products or services, which the company expects to sell in a certain time, and turn it into reality through a period that does not exceed 12 months. For example, it is the number of cell phones that you expect to sell in a month in an electronics store. On the other hand, the passive Current are all those debts, payments and obligations that the company has in the short term, an example of this, are the salaries, the raw material and the resource that is needed to produce what you sell and the payment of loans that you could have requested enter into this category.

Formula to get the working capital

The key formula that will always help you calculate it is:

Current asset - passive corrients = Working capital

Three possible quantities can result from this operation that we can interpret as the working capital:

• That the working capital is positive: a situation of good account management and a healthy balance of expenses and income.
• That the working capital is equal to zero: When assets equals liabilities, they are at a fragile point where any action can tip the balance and begin to generate more expenses than income, it is time to save on certain things and invest only in the most essential.
• That the working capital is negative: A situation of financial imbalance in which current assets are lower than current liabilities, which is why a readjustment of the business plan is necessary, as well as a possible reduction of personnel in more serious measures to save the company.

Similarly, there is no precise result that indicates the necessary working capital to ensure the future of the business, it is always very good to make decisions based on current company data, which helps to indicate the situation in which the business is, allowing you to make predictions regarding the future of your company and its development, as well as to see possible capital leaks and the best option to correct them, and possibly one day visualize possible expansions or branches when the supply of your product is not enough for the demand for it.

What is needed to interpret the working capital?

To achieve this, it is necessary to establish a deep comparison between the working capital and the tide. In case that the positive working capital will be an equivalent to high tide, in which the captain of the ship (the company) will be able to navigate his finances with greater security. On the other hand, if the tide goes out, you as captain will have to invest all your time and effort to find the new path that allows you to continue sailing.

Continuing with the analogy of navigation in finance, companies can choose between the type of navigation they want to carry out, whether an efficient one with greater opportunity and future projection that would be like sailing with raised sails taking advantage of all the wind or a more intensive one with minimal financial resources, but a maximum effort and dedication, which would be like paddling continuously until you start to navigate fluently in the tide and one day you can open the sails.

 How to improve a negative working capital?

If you already made your calculation and the fund gives you negative, do not be alarmed, all is not lost and your business has not failed, it is still time to act and correct the situation. Here are some examples that will help you positively improve your working capital:

• Requesting that your Treasury payments be postponed can help you unburden the accounts in your company.
• Make advance payments: through factoring, of all accounts that are not being paid.
• Delaying some payments by negotiating with suppliers, so that they allow you to recover from this stage that is not always completely bad, it helps you see where the company is failing to improve every day.
• Discounts or cash discounts, it is not about almost giving away the merchandise, but try to make attractive offers for your customers of the products that you sell the least, so that you do not have so much merchandise without movement.

Maintain a positive working capital

The working capital is elementary, its functions within any company cannot go unnoticed, the correct calculation of these will tell you the capacity that your business has for future projections of greater scope and of course to face short-term payments without problem, all this while you continue to make the necessary investments to your company to continue with constant production . The importance of the Working Capital Fund It is very evident and resides mainly in the fact that its positive value will contribute to guaranteeing the future of your company, and allowing it to increase its profits and profitability.

What is the ideal working capital for the company

There is no one defined as such, in such a way that the company must ensure that it has sufficient reserves in store, as well as what is paid to suppliers, employees and creditors in the short term, to ensure the financial health of your business and avoid future lows in the tide.

Conclusion:

In conclusion, it can be noted that roughly the Working capital is essential in the development and projection of a company or business, at any time, its presence is evident and should always be considered when starting a business, or managing the current one, since the most important thing is that it is positive, that you maintain a ideal balance between your liabilities and assets But we all know that the market is very volatile and that from one moment to the next, certain products can drop in price, generating considerable losses for entrepreneurs, or competition can make the market cheaper and leave you on the canvas, so it is always It is important to surround yourself with the best suppliers and always try to get the best price, direct from the factory, avoid intermediaries and you will notice the difference in your working capital.

If you ever have a negative result in your working capital it is important that you overcome and apply the advice you have read here, do not despair and think that everything is lost, it is time to act and show what you are made of, your business may still have a promising future, the important thing is that you know how to identify the current of the tide, and take advantage of it to direct your trajectory, If it is necessary to change the personnel, the furniture, the suppliers or even the final product, to convince the client that what you sell has great value and that no one from the competition, no matter how cheap it may be, will have the quality of what you offer.

In a year the purchase and sale of all goods or services is usually changing but constant over the years some months are low sales and others skyrocket, balancing the scales, So do not despair if you started in a bad quarter, since you can calculate how a certain good or service has risen and make an investment or future projection based on this prediction, which can efficiently help you discover new goods or services. to offer with which you will conquer all the market you want.