Everything To Know About What The Working Capital Of Every Business Is
Every business, to function, needs investments that keep it capable of carrying out its activities. That’s why every manager needs to know what working capital is to calculate. This cash value makes all the difference for the continuity of the business, allowing it to be constantly growing and free from difficulties.
Calculating and controlling working capital is one of the tasks that most demands attention in corporate financial management. After all, to never lose the money, managing these values well makes a big difference in your company’s health.
How about knowing more about this subject and knowing how to calculate and control your working capital? Then, better understand the concept of this financial tool!
What Is A Company’s Working Capital?
Every company has its monthly fixed costs: water, electricity, renting a store or warehouse, purchasing new products, paying employees, and others. Working capital is precisely the money that allows any company to afford it all.
The financial health of a company involves defining and managing these expenses well. What separates successful entrepreneurs from those who fail is precisely not understanding the importance of working capital. As soon as they get their first profit margins, many use all that money to their advantage without any criteria.
Well, if the company has its monthly expenses being fixed, how will they be paid without a separate amount for this? Working capital has the function of paying for all those aspects that keep the business going.
How Does It Work?
It is essential to understand that working capital needs to be rotated from one month to the next; that is, it must constantly be renewed. The costs will always be there — they will consume part of that amount, and those amounts need to be replaced.
This ensures that there is always enough reserve for everything the company needs. The values are part of the company’s equity, however, with the difference that they are fixed there while the company carries out its activities.
Entrepreneurs must understand that this capital cannot be used for other purposes, not even in emergencies. Embezzlement of working capital can have severe consequences and, subsequently generate enormous replacement difficulties. It is on these occasions that the real “snowball” forms!
Working capital can be better defined when one understands the cycles that compose it. These are periods related to activities that impact how this money circulates within the company, helping to understand the time it takes to be available.
The Operating Cycle is an important concept to understand working capital. It is about the time, that is, the interval in which the company develops its activities until reaching the receipt of the due number of sales. During this period, there are some steps, such as:
- purchase of material;
- discharge from suppliers;
- material storage;
- receipt of sales.
Search for cultivateadvisors.com for more info.