Working capital is defined as the resources a business needs to keep it running. The importance of working capital is reflected precisely in its absence, so knowing what it is and how it is calculated, as well as its relevance for a company, is essential.
If you are about to start your business and you are wondering about the importance of working capital, then we will give you the essential information to understand it, as well as the loan options for working capital.
What is working capital
Working capital or also known as net working capital, is the amount of money you need to finance the operation of a company. The concept is not minor, since it largely predicts the success of a business, since it is the resource that is required for its operating cycle.
What are the elements that make up working capital?
One of the most relevant is the operating cycle. It is defined as the time between the purchase of raw materials and the collection of sales.
The cycle of money or cash is also considered, which is directly related to income and expenses of money. For what it is considered, the period that elapses between the payment to suppliers until the cash collection.
What is the purpose of working capital?
Determining the amount that our company requires to function is the basis for establishing its achievement, as well as profitability.
What elements are considered working capital or working fund?
When we are starting a business, one of the first steps is to define what your investment will be. In this we consider aspects related to the place or space of the company, aspects of its image, furniture, among others.
In addition to this, in our investment we consider aspects related to working capital, since it is the fund that will allow the company to operate, so the administration of working capital is an essential point in your planning.
It consists of:
- Funds to purchase inventory or in some cases, funds for the production and purchase of raw materials.
- The capital for the payment of the personnel that the business will have.
- The amount of money for fixed expenses such as: service payments (water, electricity, internet, among others). In some cases, also payment of the premises or space of the company.
- Any amount that is a payment that is made periodically, be it weekly, monthly or fortnightly.
For a business to work, it must have the ability to have this amount so that it can be constantly reinvested. If we have working capital on a regular basis and it even increases, this speaks of a company with healthy finances and good profitability.
How is working capital calculated?
Depending on the characteristics of your company, sector or nature of it, it is important to consider how working capital is determined.
In general, what you should consider to calculate the working capital are the elements that were mentioned above and that are the ones that achieve the regular operation of it.
The calculation of working capital is obtained from short-term assets less short-term liabilities. That is: current assets, which can include: inventory, the cash you have, your bank accounts, short-term investments or accounts receivable. To this you subtract the current liabilities, which can be debts with short-term third parties.
Financing and working capital
Finally there are: loans for working capital. Financial, banking or government entities provide financing options for working capital to companies.
These institutions give you the option of financing to cover the need for working capital, so you will have to use this amount in basic resources to operate day to day.
The characteristics may vary according to the financial product, they are commonly revolving accounts, which means that there will be an amount available for you to use, and that once you make partial or total payments, it will be ready to be used as many times as you require.
As in any financial decision, analyze the interest rate, commissions, if they request a guarantee or endorsement, as well as the different requirements that you need. If you are thinking about this option for your business, it will surely help you to have a constant flow to face any unforeseen event or for your company to grow.