Any element that has the capacity to generate and retain financial value is categorized as Working Capital. Therefore, when defining your company’s working capital, take inventory into consideration, since assets and resources have the potential to provide profits through products and services.
It is also essential to take into account the amount of money the organization holds in bank accounts, as well as the amounts that are due to be received, such as payments agreed upon in the long term. Everything that can be translated into financial amounts, such as shares, treasury bonds, among others, is included in the list.
How to determine the value of Working Capital?
Although there are companies that specialize in calculating Working Capital, this task can be performed without much difficulty. The equation is simple and does not require extensive financial know-how:
Net Working Capital (NWC) = Current Assets (CA) – Current Liabilities (CL)
Before continuing, understand the components of this equation:
What does Net Working Capital mean?
Net Working Capital refers to the amount that the entrepreneur must keep available to avoid delays in essential payments, such as salaries, suppliers and rent. While the “global” Working Capital represents the company’s operationality, the liquid one signals the amount necessary to prevent the activation of emergency measures.
What about Current Assets?
It relates to the resources available to the company, such as cash on hand, pending payments, investments, and others. A more robust Working Capital indicates a lower operational risk.
Current Liabilities: Expenses and Obligations
This section is the opposite of the previous one: it represents short-term financial obligations, including bills such as electricity, water, internet, salaries, product values and other monthly commitments. Labor charges and rent are also included.
Financial evaluation:
Once all the values have been identified, it is crucial to assess the company’s sustainability in the face of adversity. Many adopt a six-month assessment period, but for a long-term vision, a year may be the focus. The calculation is determined by multiplying the monthly expenses by the desired period. This result indicates the reserve needed to cover unforeseen events.
How to build good working capital
Planning is the key to healthy working capital. A common mistake is to pay off all outstanding debts in one month and then spend excessively the next. It is crucial to align yourself with the established financial plan.
Working Capital for new companies:
One solution for startups is financial contributions from partners. Since this inflow of funds comes from the owners, interest is avoided. However, the return of these amounts must be agreed upon by those involved.
It is essential that newly created companies have a financial reserve for at least six months of operation. This prudence takes into account the time required to consolidate the brand and attract customers. However, relying excessively on contributions can temporarily harm the liquidity of the partners.
And for micro-enterprises?
Experts suggest three approaches for micro-enterprises to strengthen their Working Capital:
- Factoring: For those who need cash immediately. However, there are associated costs.
- Lines of credit: Although practical, they require caution due to interest rates.
- Online loans: They are quick, but require diligence in choices and attention to fees and security.
What about MEI?
Individual microentrepreneurs can benefit from microcredits. These are loans of up to R$20,000 aimed at investing in the business. However, it is vital to have discernment and management when applying these resources.
Have you ever heard of Negative Working Capital?
It is a warning sign, indicating possible financial imbalances. However, it can be a natural phase for expanding companies.
Revolving and Own Working Capital:
The first refers to accessible credits to cover immediate expenses. The second, in turn, is the company’s ability to meet its obligations without resorting to loans.
Efficient Working Capital Management:
To ensure good management, it is crucial to monitor the Working Capital Cycle, which defines the time between paying suppliers and receiving payments from customers. Inadequate management can result in cash shortages.
Working Capital is a fundamental aspect of a company’s financial management, representing the resources needed to sustain daily operations. It encompasses elements that generate and retain value, such as inventory, bank resources and amounts receivable.
The basic formula for calculating Net Working Capital is to subtract Current Assets from Current Liabilities. While the former refers to available resources, such as pending payments and investments, the latter covers short-term financial obligations, such as expenses and salaries. Efficient management of this capital is vital, and it is necessary to monitor the time between payments to suppliers and receipts from customers.
For new companies and micro-enterprises, there are different strategies and financial options, such as contributions from partners, factoring, lines of credit and online loans. MEIs can resort to microcredits offered by institutions.
Finally, it is crucial to be aware of indicators such as Negative Working Capital, which can signal financial problems, and to know the differences between Revolving and Own Working Capital.