Working Capital Write For Us – Working capital – or “net working capital” (CTN) – is a measure of a company’s liquidity.
It is the difference between a company’s current assets (everything it owns or is owed, such as cash and accounts receivable) and its liabilities (everything it owes). The assets taken into account when calculating the CTN are usually those that will be collected or paid in the next year.
Therefore, a company can have a positive working capital, which allows it to pay its bills and debts and invest in its growth, or a negative working capital.
How to Calculate Working Capital
Calculating working capital is easy. To understand the current CTN of a company, it is enough to subtract its current liabilities from its current assets.
The formula is the following:
Current possessions – current liabilities = net working capital (CTN)
The result can be a positive or negative number used to determine a company’s financial risk profile. Positive employed capital indicates that a company can service its debts and is in a position to facilitate growth. In contrast, negative working capital indicates that the company may be in trouble.
Considerations for calculating working capital
When calculating the CTN, we must first consider a company’s current assets. These may include:
- Liquid capital (treasury).
- Stocks and inventories.
- Accounts receivable (unpaid invoices by customers).
Once the company has added the value of its assets, it must subtract the cost of its liabilities. This is all that the company should and can include:
- General expenses, such as rent and utility bills.
- Employee salaries.
- Accounts payable (unpaid invoices to your suppliers).
The resulting sum is the company’s net working capital.
Why is working capital necessary?
Working capital is essential because it helps businesses know if they can meet their expenses and “keep the lights on” or risk being unable to pay their bills.
Calculating a company’s net working capital provides a good benchmark for measuring return and risk. For example, if a company has significant positive working capital, it knows that it can afford to reinvest the liquid capital in growing its operations.
However, negative working capital suggests that the company is stretching itself too thin and may need to adjust its business model to avoid a financial penalty or bankruptcy.
Therefore, it is essential to regularly review working capital and use it as a critical performance indicator alongside other financial calculations.
Reasons why a company may need additional working capital
Although all companies would like to have a little extra money, there are many everyday situations where a company, particular industries, may need to access more working capital. These can be:
- SMEs may need additional liquid capital to finance early growth. For example, to hire new talent and pay overhead as they expand into new facilities.
- Manufacturers or retailers may occasionally need liquid capital to finance bulk orders from suppliers. For example, to take advantage of limited-time offers.
- For many businesses, expenses increase during certain “peak” times of the year. This may include paying annual taxes or meeting deferred payment terms.
- Many businesses experience seasonal fluctuations, such as some hospitality and leisure services, and may need to raise additional capital during peak seasons to stay afloat during the quieter season.
Working capital cycles
A working capital cycle is a time it takes for a business to convert its assets and liabilities into cash. Working capital cycles are different for each company and depend on the respective payment terms of accounts receivable and payable and how long you hold stock before selling it.
Shorter working capital cycles are helpful to businesses as they allow them to have the liquid capital to invest elsewhere for growth. Longer working capital cycles leave a company’s assets tied up in accounts receivable and payable.
Stenn helps companies enjoy shorter working capital cycles by turning their accounts receivable into liquid capital, which they can use to pay off debt sooner and finance growth.
As a non-recourse invoice factoring provider, Stenn protects suppliers against non-payment. In this way, we assume the risk and responsibility towards the buyer.
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