Working capital is a measure of the company's liquidity

In the economic sphere, the working capital is the indicator characterizing the amount of funds that do not depend on current liabilities. In other words, it is the share of the finance of a company that is not used to repay external or internal debts for a certain period of time.

General concept

The working capital has its name from the English term Net Working Capital (NWC). But in Russia its other name is more popular - its own working capital. They show what kind of capital an organization or company has to support its activities financially.

If we briefly analyze the concept of "working capital", then this indicator is the difference between the amount of current funds and current liabilities. Its size determines the liquidity of the firm. If the working capital increases, this indicates the growth of the company's liquidity, which also leads to an increase in its creditworthiness. But here there is a downside to the coin. In the case of too high working capital, there are doubts about the correctness of the economic policy pursued by the company's management.

Calculation formula

The optimal cost of working capital (or the amount of working capital) is calculated depending on the individual needs of the particular organization and the scale of its activities. Also important are the features of the work, the timing of inventory turnover, the amount of short-term debt, the conditions for attracting loans, loans, etc. As practice shows, both excess working capital and the shortage of working capital can negatively affect.

To calculate how much working capital should have, there is a simple formula. From current assets, it is necessary to take away short-term obligations, and as a result we will get the desired value. You can use another, no less true way. We add to our own circulating assets long-term liabilities and take out non-current assets from the received amount.

How to manage working capital

The complexity of managing the NWC is that working capital always maintains its optimal value. What does the optimal mean? This means a value that would allow the company to perform all functions and continuously engage in core activities.

At the same time, do not overestimate the indicator, since this can result in the withdrawal of a significant part of the money from circulation. Management of working capital goes in parallel with the correct financial management, which includes several items:

1. Determination of total working capital requirements.
2. Indication of the level of investment in this indicator.
3. Identification of sources of financing.
4. Analysis of the influence of working capital on income and on the value of the enterprise.

Based on all of the above, managers who manage the working capital, in principle, work to maintain the company's liquidity.

The causes of lower working capital

Often there are cases when the organization's current assets are almost equal to the amount of short-term debt. This can lead to the fact that the firm will be declared bankrupt. It requires a clear work of leading managers, whose task is to monitor the indicator. If there is such a tendency that working capital gradually decreases, this indicates the irrational use of funds.

The reasons for the decline can be very different, among them - a drop in sales volumes, which, in turn, provokes a decrease in accounts receivable. In this case, the balance of current assets will decrease, and behind them - the value of working capital.

What does working capital say?

Often a large company or corporation has many investors who are interested in its fruitful work. Thanks to the indicators of working capital, they can see a real picture of the effectiveness or inefficiency of the company's operating activities.

For example, if receivables are collected at a slow pace, this leads to higher working capital and inefficient activities. Also, the irrational investment of funds can negatively affect, due to which the indicator of working capital will increase. This indicator should be considered in a few short periods of time to compare and analyze.

The movement of capital

In commercial organizations there is a movement of capital, labor both within the country and at the international level. In particular, the movement of working capital is observed in investing, including foreign, for profit. In addition, to date, firms use inter-bank export credits. It is interesting that the state authorities reserve the right to control the international movement of capital, even if it belongs to private or legal entities.