Tipswalet. Working Capital Finance Definition – If you work as an accountant or profession like this in a company, you will definitely find the word ‘Working Capital’. For those who are really pioneering a business, or people with special education, the accountant is the usual term. They have understood very well, what is meant by working capital. But, for some people who are still layman will ask, what is working capital?
Well, for those of you who don’t know about working capital, it’s a good idea to study the following definitions of working capital:
What is Working Capital?
Refers to Wikipedia, Working capital is capital used by a company as a company’s operating costs, which has less than one year of cash turnover through the proceeds from the sale of its products. Usually, there is a separation between the company’s current assets, such as cash, accounts receivable, inventory of raw materials and finished goods, and current obligations, such as debt obligations to banks. Working capital is also known as net working capital (NWC)
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In another sense it is stated, Working capital is a measure of company liquidity, operational efficiency, and short-term financial health. If a company has large working capital, it must have the potential to invest and grow. If the company’s current assets do not exceed current liabilities, then it may be difficult to grow or repay creditors, or even go bankrupt.
How to calculate working capital
To calculate working capital, you can compare a company’s current assets with current liabilities. Current assets, whose position is in the company’s balance sheet usually include cash, accounts receivable, inventory. There are also other assets that are expected to be liquidated or converted into cash in less than one year. Current liabilities are obligations that must be fulfilled in the same period of time such as trade payables, wages, tax debt, and the current portion of long-term debt. In another side, Current assets are available in 12 months. Not too deference with the current asset, current liabilities will mature in 12 months.
Working capital that is in line with or higher than the industry average for companies with comparable sizes is generally considered acceptable. Low working capital can indicate the risk of danger or default.
Changes to the working capital formula Affect the Company’s Cash Flow
Working Capital Finance Definition was informed that this must think carefully. You know, if the company both small and well-known now starts from working capital that has been carefully calculated. Most new and large projects such as expansion companies in production or into new markets require investment in working capital. This aims to reduce cash flow. Even so, still the amount of cash will also decrease if profits are collected too slowly. Or under other conditions, if the sales volume decreases, it will have a bad impact and cause a decrease in receivables. Companies that use working capital inefficiently or changes in working capital formulas can increase cash outflows to ultimately suppress suppliers and customers. Of course, you also definitely think this will have a very bad impact on the company right?
The working capital used by most companies today is of two types, including:
1. Permanent working capital: is working capital that must continue to exist in the company to continue to carry out its functions.
Permanent working capital can be divided into:
- Primary working capital: minimum working capital that must exist in the company to guarantee the continuity of the company.
- Normal working capital: the working capital needed to carry out the production area.
2. Variable working capital: It’s whose amount changes according to changing circumstances.
Variable working capital is divided into:
- Seasonal working capital: a variable amount of working capital caused by seasonal fluctuations.
- Cyclic working capital: working capital whose amount changes due to fluctuations in conjuncture.
- Emergency working capital: working capital whose amount changes due to an emergency situation that is not known beforehand.
Well, that was the definition and definition of working capital. Working capital financial policies are usually held by people who are experts in the economic field. This is not playful considering the change in a formula on working capital will be very beneficial to the company.