What is the working capital and why is such an important magnitude?


When performing an accounting control of our company, we must take into account a number of key variables that can make the difference between a company enjoying excellent health and a company that is on the verge of bankruptcy.

As you know any financial, one of these magnitudes is working capital (FM), for two main reasons: first, because it helps to ensure the survival of the company and secondly because it can increase the profitability of it. However, what exactly is the revolving fund and why it is so important to consider magnitude?

Image Source: Google Image

What is working capital?

Conceptually, the working capital is the difference between current assets and current liabilities. The first is made ​​up of stocks, treasury, receivables short – term and generally any liquid assets, while the second is made ​​up of the payment obligations in the short term, i.e. which are enforceable in a shorter period one year.

Recourse to an image bar to see what is graphically. Starting from the bottom, the assets are ordered from high to low liquidity, while liabilities are sorted from highest to lowest charge ability, with the current liabilities payable in a shorter period.

Seeing him in the chart is clearer terms what concerns this magnitude. As its name suggests, the working capital refers to the capacity (maneuver) having a company to meet its short-term payments and, simultaneously, to make investments or acquisitions of own any commercial activity.

Why is it important to maintain a positive working capital?

Logically, and in general terms, a company will have good health when working capital is positive, and will be much more healthy, from the point of view of liquidity, the higher this magnitude. Otherwise, when the FM is negative the company has sufficient resources to meet its immediate obligations, and may suffer serious problems.

However, there may be exceptions to this general rule. And it may happen that, even if a company has a positive FM, can pass through liquidity difficulties. Such is the case of having stocks where there are doubts that can be sold, loans maturing in the short term serious doubts collection or cash to be used for unforeseen contingencies.

You may also like to read another article on HeyGom: What are the types of credit?

Similarly, not always a negative FM states that have liquidity problems. In large areas of distribution, cash sales are made ​​while due to its great bargaining power with suppliers, get to have a much more elongated periods of payment. In this case, although the current assets is less than the current liabilities as cash percentage is so high not usually go through session liquidity.

However, although there are some exceptions that break the rule, normal and recommended it is that the working capital is positive. To determine the amount, we must properly analyze the balance sheet of the company as well as our strategy on what to acquisitions and inversions short term is concerned.

Consider that this magnitude marks the light of the liquidity of our company. We must be careful when the light is red, because it can even lead to filing bankruptcy. In subsequent articles, we will detail how we can calculate the ideal background maneuver and some actions to improve working capital.