Meaning of Working Capital

Meaning of Working Capital

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 assets left over in relation to the short-term liabilities.

According to abbreviationfinder, 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 in it.

Specifically, we can establish that all working capital is sustained or formed from 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.

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 that is given to said capital is to undertake the disbursements of what is the cost of the goods that have been sold and also to face the different expenses that the operations that entail. have been rushed.

However, among other uses are also the reduction of debt, the purchase of non-current assets or the repurchase of outstanding capital shares.

When current assets exceed current liabilities, you are facing positive working capital. This means that the company has more liquid assets than debts with immediate maturity.

In the other sense, negative working capital reflects an equity imbalance, which does not necessarily represent that the company is bankrupt or that it 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 assets, to obtain the available asset. Other possibilities are to carry out capital increases or incur long-term debt.

In addition to all the above, it is important to also 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 quantity of current assets that are needed to cover in the long term what are the minimum needs.

And then secondly, we have temporary working capital. In this case, it can be determined that it is the amount of these current assets that is changing and modifying based on the requirements or needs of a seasonal nature that take place.

Among the sources of working capital, we can mention normal operations, the sale of bonds payable, the profit on the sale of negotiable securities, the contributions of funds from the owners, the sale of fixed assets, the refund of the tax. on income and bank loans.

It should be noted that the working capital should allow the firm to face any type of emergency or loss without going bankrupt.

Working Capital


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