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How to calculate the working capital of a company or business

The working capitalIt is a fundamental aspect to be considered by a business or company so that it can carry out a correct financial and economic management with a short-term vision, but what it is specifically, how it is managed and what the net capital is, you will know below:

What is the working capital formula

In every company, financially and economically, there is a current liability and a current asset. The difference between the two is the working capital, since this is the criterion applied by the specialists.

So the formula is the following:

CT (working capital) = AC (Current assets) – PC (Current liabilities)

What is working capital

Therefore, working capital is the funds that allow the company to continue investing and acquire liquidity in order to stay in business.

It is the ability of the company to continue developing its activities with a short-term vision, because once the company is started, it needs to continue its path with resources, raw materials and supplies in addition to labor, to face expenses of operation, buy fixed assets, etc.

So it is a capital that must always be available so that the company can meet its needs in the short term and on time.

Example of working capital

A company establishes its working capital from a formula that is put into practice …

Assuming that the company as Assets has a total of 10,000 in cash and in Banks it has a total of 30,000. Its Current Assets is 40,000.

If, as Liabilities, you have a total of short-term Debts of 15,000 and in your Suppliers account you have a total of 6,000, the total of your Short-term Liabilities is 21,000.

Therefore, the company will root this calculation from the formula:

The short-term assets is: 40,000 – Short-term liabilities: 21,000, the difference is: 19,000.

It means that the capital of the company for reinvestment, etc. is 19000. If this capital is not enough to meet your needs, you will need to seek financing, either internal or external, analyzing the interest rate and looking for options for a quick repayment.

The company must evaluate if it can cover current liabilities with current assets and if after that it has cash for inputs etc.

A deficit in working capital occurs when current liabilities are higher than current assets, which leads to understanding the insolvency of the company because it can not meet the debts.

Faced with this situation, you could request financing with a long-term loan or propose the sale of long-term assets, avoiding dissolving the organization or continuing to operate from the restructuring of the debt in order to pay it off.

work capital Management

The Administration of the working capital It is what allows the company to face its debts and on time to avoid paying a higher cost and also taking into account the examples of working capital, allows the company to be solvent and to function properly, meeting all its needs, maintaining your productive activity, without fear of periods of shortage, because you will be prepared due to the good management of your working capital.

Ultimately, it is what allows the economic and financial balance of the company taking into account its debts so that its development can be carried out in the long term, since the company will have less risk of lack of liquidity when it has a significant amount of assets circulating.

All of this is done by managing cash, accounts receivable, and inventories.

Properly managing the cash, it allows the company to obtain resources to carry out its commercial activity, for which it is necessary to carry out an internal audit that will be in charge of the evaluation and qualification of the procedures carried out by the business policies and then carry out the recommendations that you consider necessary.

Net working capital

The net working capital are all the resources of the company that allow it to continue operating after having faced short-term liabilities, since they are resources that the company must have available when it needs it, therefore they are short-term because they must be available immediately upon request.

To calculate the net working capital, this formula is carried out:

CNT (Net working capital) = PC (Current liabilities) – (Current assets)

From this calculation, a comparison can be made of the total current assets on a specific date with the total current liabilities, resulting in the resources available to the company to make it available for its financial operations without the need to access to other funds.

It is an important calculation for the business administrator because it allows them to know the need for long-term liabilities to finance current operations.

If, when the company administrator analyzes the net working capital, he notices that the difference found between current assets and current liabilities is high, it means that the company has greater liquidity.

However, it should not be so high because it may mean that you have unnecessary resources, nor should it be very low because it would interfere with business activity.

In short, beyond that it varies from one company to another according to various factors, in general it must respect basic characteristics such as having a positive result and showing an increase year by year.

Finally, net working capital is understood as the financial resources that a company has to cover its needs within a specific economic period, after which it can remain stable, with liquidity or solvency, for this reason the current assets must exceed current liabilities, since if it is the same there would be no working capital and by the way the business situation would not be the best because it would not have stability and its solvency would be very low.