What is the Working Capital?

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The working capital is the ability of a company to meet short-term expenses and different investments, taking into account the resources it has available in the long term. Therefore, from this data a company will be able to know if it is capable of facing immediate payments and debts.

What is it for

Mainly it allows to know the liquidity that a company has, so if the result is positive, the company has that solvency, and if it is negative, it can have serious economic consequences. For calculate it, you have to know what is the current assets and current liabilities. Thus, the following formula is obtained:

Working capital (FM) = Current assets (AC) – Current liabilities (PC)

He current assets make reference to any type of liquidity make it short term. On the other hand, the current liabilities refers to the opposite, since they are the payment obligations that the company must face in a short period of time.

However, this data may not really reveal the financial status of the company, since it may occur that it may have current assets that in the end cannot be sold, or have long-term payment commitments with suppliers. it will be necessary then take into account what is considered within each of the elements of this formula.

Advice if the result is negative

If the result is positive, at least at that moment you can know that your company has the solvency to meet the financial obligations of the coming months. On the other hand, if the result is negative, then you will have to take actions that allow you to ensure the continuity of your business. Some of them are:

  • Apply for alternative financing: It can be requested both to face payments and to use it in your usual investments. The objective is to have liquidity through an agreement that benefits both parties to the agreement.
  • Delay payments: Whether they are for public administrations or your suppliers, sometimes you will have the option of renegotiating the payment term in order to generate a little more margin in your finances
  • Use discounts to increase sales: Although it is an extreme measure, it can help you balance your financial situation. The objective is to make discounts for immediate payments from your clients to obtain the liquidity you need.

 

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