Working capital is the ability of a company to carry out its activities normally in the short term.
Working capital is defined as the ability of a company to carry out its activities normally in the short term. This can be calculated as the excess assets in relation to short-term liabilities .
Working capital is useful to establish the equity balance of each business organization. It is a fundamental tool when carrying out an internal analysis of the firm, since it shows a very close link with the daily operations that take place within it.
Specifically, we can establish that all working capital is sustained or formed by the union of several fundamental elements. Among them, those that give it meaning and form, are negotiable securities, inventory , cash and finally what is called accounts receivable.
About working capital
It is also important to highlight the fact that the main source of working capital is the sales made to customers. Meanwhile, we can determine that the fundamental use given to said capital is to undertake the disbursements of what is the cost of the merchandise that has been sold and also to face the different expenses that the operations that entail entail. have been undertaken.
However, other uses also include debt reduction, the purchase of non-current assets or the repurchase of outstanding capital shares.
When current assets exceed current liabilities, we have positive working capital . This means that the company has more liquid assets than debts maturing in the immediate future.
In the other sense, negative working capital reflects a capital imbalance, which does not necessarily represent that the company is bankrupt or has suspended its payments.
Negative working capital implies a need to increase current assets . This can be done through the sale of part of the fixed or non-current asset, to obtain the available asset. Other possibilities are to carry out capital increases or contract long-term debt.
Working capital is calculated as excess assets in relation to short-term liabilities.
Other types
In addition to all of the above, it is also important to emphasize that there are two other types of working capital that are delimited based on time. Thus, first of all, we would have to refer to what is known as permanent working capital . This is defined as the set or amount of current assets that are needed to cover what are the minimum needs in the long term.
And then secondly, we have temporary working capital . In this case, this can be determined to be the amount of those current assets that varies and is modified based on the seasonal requirements or needs that take place.
Sources of working capital
Among the sources of working capital, we can mention normal operations, the sale of bonds payable, the profit on the sale of marketable securities, contributions of funds from the owners, the sale of fixed assets, tax reimbursement on income and bank loans.
It should be noted that working capital should allow the firm to face any type of emergency or losses without falling into bankruptcy .