What is working capital and how does it work?

For any business to work well, it takes financial resources, right? In this way, to continue its work as a service provider and/or product seller, there is the working capital.

But, after all, what is working capital? Working capital is nothing more than the money needed to pay for the continued operation of the company. your company, including amounts invested in cash, at the bank, for the purchase of inventory and receipt of customers.

What is working capital and how can it be used?

Using the working capital amount, the company can pay expenses such as:

• Payment of suppliers;
• Salary of employees and collaborators;
• Raw materials, products and equipment;
• Taxes and fees;
• Operational expenses.

As already mentioned, in general, working capital includes the financial resources necessary to cover all the financial accounts that rotate and move the business routine.

How does working capital work?

This resource is responsible for guaranteeing the financial “health” of the enterprise, since it is responsible for the financial amount that will cover the fundamental needs of the company.

How to calculate working capital?

O working capital calculation it is based on the financial management of the business, so that all the company's crucial expenses must be well delimited, that is, know exactly how much to pay employees, how much money will be allocated to suppliers, point rent, taxes and all other expenses.

With this in mind, the calculation formula becomes simple. To do this, just add the Current Assets (Investments) and reduce the Current Liabilities (Sources of Resources).

CGL = AC – PC

Importance of working capital

Understanding the company's working capital is of paramount importance so that some crucial business processes are properly fulfilled, such as tax and salary payments.

With the resource, the company becomes more stable and moves away from bankruptcy possibilities, this because working capital has the capacity to supply the company in its operational activities (costs and expenses); financial investments; compliance with suppliers' payment deadlines, among others, are essential examples of the importance of this for the company.

How to avoid mismanagement of working capital?

Aspects such as the reduction in sales, the growth of defaults, the increase in costs and waste can happen and leave the company in the red.

Many entrepreneurs choose to loans, which by the way, work with high interest rates, which makes this alternative mean a risk. Not to mention that working capital must cover routine expenses and, precisely for this reason, must be supplied with the company's own resources.

Following this logic, it is not appropriate to increase the level of indebtedness to finance this operation. Loans are viable for investments in new projects, expansion and business growth.

However, to avoid this type of problem, it is possible to adopt habits and measures that aim at strict control that collaborates for an optimized management and thus prevents the insufficiency of working capital.

Therefore, it is necessary to adopt measures such as:

• Negotiate long-term debts / Renegotiate debts;
• Keep a clear management of defaulters;
• Have in-depth knowledge of cash flow, payment terms and inventory circulation;
• Carry out documentation of financial processes / Establish financial processes;
• Maintain a cost and expense reduction policy.

A good alternative is also to carry out periodic accounting reports that are capable of helping and monitoring the progress of working capital, so that when necessary, adopt corrective measures, and thus carry out a more effective management, guaranteeing the financial health of the company and extending the possibilities of success of the business.

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