What is working capital used for?
Working capital is used for day-to-day operations necessary for the operation of a business. It seems quite direct, yes? It is, then why do so many small business owners avoid making better use of working capital to improve their business? The simplest answer is that they do not do it for fear of failure. You have worked hard to build your business; you have endured months, maybe even years without having hardly any earnings, wondering if you will arrive next month and if you will be able to pay your employees. But your hard work and your perseverance have paid off; you have money in the bank. You have the necessary cushion for those times of the year in which you may sell less or you do not have the necessary funds to offer your employees vacation bonuses. Why would you want to spend that valuable money? The answer is simple: to stay competitive.
Importance of working capital:
The importance of working capital has its basis in a time when industries had a secure relationship with agriculture. Bank loans were used, whose maximum maturities were one calendar year, which was used to finance the costs related to the purchase of the raw material and the processing thereof, which were canceled with the sale of the finished products.
It can be said that the importance of working capital is an investment made by the company in assets that can be realized in the short term, such as cash, negotiable securities, accounts receivable and inventories. With respect to net working capital, you refer to current assets minus current liabilities, including bank loans, commercial paper, salaries, and accumulated taxes. If the assets are greater than the liabilities, net working capital is obtained, where the company realizes its operating base. However, some companies that have a predictable cash flow can operate with negative working capital.
Administration of working capital
If the working capital is positive, you can obtain a positive judgment on the financial structure of the company, if negative it means that the financing of fixed assets is taking place with short-term sources and it is possible to run into financial problems.
A correct administration of working capital will be fundamental, and even more so because in certain companies they represent more than half of the total assets of the same. A company that operates with certain efficiency needs to monitor and control accounts receivable and inventories. If a company is in strong growth, its control is necessary because the investments made can easily be left outside the supervision area. The management of working capital requires an understanding of the interrelationships between assets and current liabilities. It is usually used to measure financial risk due to the insolvency that the company may present, that is why the more solvent the organization is, the less likely it will be to comply with the debts contracted. In the event that we find ourselves with a low level of working capital, the company will not have the necessary liquidity for the fulfillment of the debts, representing a financial risk for it. Your chances of success in life and in business can be expanded by having the right mentor like Brian Paes Braga. Brian Paes-Braga serves as the President, Chief Executive Officer & Director at Lithium X Energy Corp.