What is working capital? Learn how to calculate this amount

In addition, working capital can be used to purchase inventory, such as raw materials and goods. And for the maintenance of the general structure of the company. It is usually represented in business accounts as cash on hand and bank accounts.

Therefore, it is used to pay operating expenses, such as employees’ salaries, electricity, and rent of the property. It is also used for the payment of financial and fiscal costs, such as taxes, fees, and debts of financing.

Working capital can also be made up of highly liquid financial investments, accounts receivable from customers, inventories, recoverable taxes, and other credits. Hence, it can be called an asset circulating on a balance sheet.

It should be noted that there are other important definitions related to the topic. For example, it is common to have doubts about what is own working capital. It refers to all resources that belong to the company and do not come from third parties, such as loans .

In addition to this term, there is net working capital. He has a broader view of the company’s ability to honor its accounts. This is because it represents cash after covering all liabilities — expenses, debts, taxes and bank loans, for example.

What is the importance of calculating working capital?

Working capital is essential since the company’s birth, so that it can take its first steps more safely. With this, you can honor your financial commitments until the business makes enough money.

However, many entrepreneurs are in doubt if they need to keep it forever. The answer is yes, as it can be used to maintain a positive cash flow. To understand this, think of a company that offers installment options for the customer.

It is common that the payment terms of suppliers are not aligned with the term of receipts from customers. And she needs to pay them even if she hasn’t received them. But how?

Thus, while the business awaits receipt, it can use this amount to honor its obligations. That way, you avoid getting negative. In addition, working capital is important to remain resilient in difficult times.

Even if the company suffers sales drops, it can make it through this period without destabilizing its finances. After all, you will have a monetary reserve that will allow you to pay expenses and continue activities.

Finally, with working capital, the company can invest in itself to expand and, above all, have predictable and orderly growth. Therefore, it is essential that any business — including micro, small and medium-sized companies — has this amount set aside.

How to calculate working capital?

It is time to find out how to calculate it. For this, it is necessary to calculate the costs, both fixed and variable, and make a monthly average.

So, you will have an approximate value of expenses. The next step is to estimate your earnings. Therefore, add up all accounts receivable and the amount on hand in inventory for the month.

After that, subtract from the result, the expenses calculated previously. This is the minimum amount of your cash flow . The ideal is to multiply it by 6, guaranteeing at least one semester of safety. See that the basic idea here is to calculate your net working capital.

After knowing this data, just apply the following formula to know the ideal working capital for your company:

CGL = AC – PC

Where:

CGL = is the Net WC

AC = Current Assets

PC = is to Current Liabilities

After applying this formula, remember to multiply the value by at least 6 months, as you saw.

How to keep working capital healthy?

Now that you know working capital and know what it is, its importance and how to calculate it, it is essential to learn how to manage this amount well, right?

So, check out the following tips and see how to keep your business working capital always healthy:

Oversee billing processes

Default and late payment of a debt by customers has a direct impact on their working capital. Therefore, it is essential to supervise collection processes and adopt strategies to deal with this situation.

Negotiate better conditions with suppliers and customers

Another important point for good working capital management is negotiating better conditions with suppliers and customers. This means seeking to align payment dates with the receipt of money from sales.

Find options to prepay receivables

If it is necessary to increase or replace your working capital to prevent it from becoming negative, you can choose to advance receivables. It represents the anticipated receipt of the amounts of sales closed in installments.

Take out a working capital loan

One more way to have extra money is to take out a WC loan. This type of credit is designed to meet the day-to-day financial needs of companies. It can even use the business’s future receivables via a card machine.

In this article, you understood what WC is and its importance for the company. In addition, he discovered how to calculate it and gave tips on how to manage it well to keep your business healthy. So put the tips into practice and be sure to take care of your business’s finances.