In this article with updated content, learn what working capital is and how to calculate it.
We explain what cash flow is, the types of cash flow that exist and how they are calculated.
Calculating working capital and cash flow is vital for proper financial management . Both magnitudes allow us to know the financial health of a company and its ability to meet its payment commitments .
Before calculating these indicators, there are two points that we must take into consideration:
Integrity of accounting information: we must ensure the quality of the accounting information . If the accounting does not reflect the true image of the company, the result of cameroon email list these indicators will not be reliable and may lead to errors in decision making.
Calculation automation: applications such as Sage 50 make it easy for you to calculate your business's key indicators in an automated way.
POST CONTENT
Working capital is a financial indicator that shows a company's ability to cover its short-term payment obligations with its current assets . It is a measure of liquidity and efficiency in working capital management .
In addition to meeting its payment obligations, the company must also be able to make investments or acquisitions that are part of any commercial activity. To do so, the working capital must be positive, since there is a part of the current assets that must be financed with permanent capital.
Working capital is also known as circulating capital, working capital, rotation fund or by its English term “ working capital ”.
The formula for calculating working capital is very simple:
Working capital = Current assets – Current liabilities
Current Assets: are those assets that can be converted into cash in less than one year, such as accounts receivable, inventories and treasury.
Current Liabilities: Represents debts and payment obligations to be paid in less than one year, such as accounts payable, taxes and other short-term debts.
Start using Sage 50 and benefit from the automated calculation of your business's key indicators.
What does a positive, negative or zero working capital mean?
Positive working capital: indicates that you have sufficient liquidity to meet your short-term obligations and that you can invest in the growth of your business.
Negative working capital: means that your short-term liabilities exceed your current assets, which may put your company's solvency at risk, and you may not be able to meet your immediate payment obligations.
Zero working capital: indicates that your current assets and current liabilities are balanced, but it may be a sign that your company has little room for maneuver.
Why is it so important to know your company's working capital?
Working capital is crucial because it allows you to:
Know your liquidity: you will know if you have liquidity to meet your short-term payment obligations.
