Whatever the size of the company, one of the most important aspects to control itself in financial management is the Giro capital. Over time, several studies have shown that the lack of resources for turn is a major cause of business closing, as this compromises the financial health of the organization.
It is working capital that allows companies to fulfill their financial obligations – salaries, suppliers, taxes and everything else that relates to the daily life of the operation. As experts say, it is the “company’s oxygen” and, therefore, managers can never neglect it.
Next, we will show the main aspects related to this concept – definition, how it works, importance, how to calculate, and so on.
What is working capital?
A company’s working capital are the resources it has to keep its operation running.
Think of the dynamics of a business. To sell a product or service, the company needs to set up a structure – buy goods, have employees, rent a building or commercial room, have internet and telephone, and so on.
This whole structure should be funded by working capital, which, in turn, is in cash, inventory, customer account and other receivables.
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It is essential that this whole context is considered in the company’s business plan, as we will see in the next item.
What is the importance of working capital?
Basically, because it is the working capital that guarantees the company’s financial health.
In other words, the continuity of the operation depends on the working capital. To continue selling, it is necessary to pay suppliers, employees, and other commitments, as well as it is important to ensure that stocks and sales receivables become cash at the right time – and there is one of the most frequent (and serious) problems of working capital management.
Many companies have financial problems even with profit and growing sales. This can occur when there is delay or difficulty converting inventory and receivables from cash customers in cash.
To understand the importance and impacts of working capital on a company’s financial management, let’s now look at two examples – the first, linked to sales; the second, in stocks.
Example 1 – Increased sales
Taking advantage of the year -end heated demand, a company that provides food for events accepted extra orders. According to financial estimates, to meet the new contracts, it will be necessary to spend about 60% more than usual with raw materials, waiters and other parties items.
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That is, the company will need more working capital to take additional work. If it does not have this cash money, you will need to negotiate any advances with longer customers or deadlines with suppliers. Another way out would be to resort to banks to meet this punctual resource need. However, this would probably be the most expensive alternative due to interest rates.
Realize that increased sales necessarily go through more working capital so that the company can maintain its balance.
Example 2 – Increased stocks
A company that sells sports goods has decided to buy 30% more female tennis than its normal to take advantage of a supplier’s annual settlement. To get the 40% discount on the goods, the amount had to be paid in cash.
However, the company took a few months (more than imagined) to sell the entire additional tennis stock it had bought. And most sales were on time, because even granting discount, there were few customers who bought cash.
This caused a momentary imbalance in the company’s cash, and she had to resort to a credit line at her bank to pay everyday commitments. In this case, the result of additional sales was practically absorbed by loan interest. That is, it was not worth using the money from the turnover in stocks, as liquidity was lacking for the spending of the operation.
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Again here, we realize the importance of good working capital management. Something that looked like a good opportunity (50% off tennis) turned out to be a cash problem for the company.
What is the difference between working capital and profit?
As we have seen, working capital is the amount of money the company needs to ensure the continuity of its operation. These resources basically come from cash, accounts receivable, inventories, and so on.
Net profit is the result that the company has earned in a certain period (month, quarter, semester, year or other time clipping). To reach net income, all costs and expenses of the period – production costs, taxes, electricity, water, internet, among others must be deducted from sales.
In other words, net profit is the amount that is left for the company after all these deductions. In turn, working capital are the resources that make the day to day of the operation.
How to calculate or turn capital?
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The first step is to have an up -to -date company balance sheet, or a management and expenses management control. Remembering that even, who is not required to have an accountant, must keep the financial records up to date so that he can do good business management.
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In these records, we find the items that form working capital, which are the accounts of the current assets and the company’s circulating liabilities
Some examples of accounts classified in circulating assets are:
- cash in cash;
- Bank account balance;
- short -term financial investments;
- Accounts receivable from customers;
- stocks
In turn, the circulating liability is formed by accounts such as:
- suppliers;
- Short -term bank loans and financing;
- wages and social charges to pay;
- Rentals payable;
- taxes
With this information, simply apply the formula of networking capital (CGL):
CGL = Current Assets – Current Liabilities
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Example:
Imagine that, on a certain date, a company has the following financial balances:
- Cash in cash: R $ 10,000
- Accounts receivable from customers: R $ 80,000
- Stocks: R $ 20,000
- Suppliers: R $ 50,000
- pay salaries: R $ 20,000
- Taxes payable: R $ 15,000
In this situation, its net working capital would be $ 15,000, according to the formula:
CGL = (10.000 + 80.000 + 20.000) – (50.000 + 20.000 + 15.000) = 15.000
What is the difference between working capital and net working capital?
In fact, net working capital is another way of referring to a company’s working capital. Accounting, the two concepts refer to the resources necessary for the organization to work during its operating cycle, which goes from the purchase of goods and/or inputs until the effective receipt of sales.
Is working capital the same as an emergency reserve?
No. By the way, it is exactly the opposite: mixing both concepts can damage the company’s financial health.
The function of is to ensure tranquility in times of financial unforeseen events, such as default or spending on some kind of claim, for example. Therefore, it must be maintained as a use of working capital.
What is its own working capital?
Own working capital is what the company can generate with its own resources without having to resort to third parties. The positive cash balance, the profits reinvested in the operation and the money of the partners are some examples of own resources applied to the Giro.
What is null turning capital?
Null turning capital arises when the CGL formula results in zero. By itself, this situation is not a problem, but it serves as a warning to the company, because it means that it has no reserve in the turn if it needs more resources for the turnover.
How to increase working capital?
The main task of a company’s financial management is to keep working capital at a comfortable level, sufficient to account for the operating cycle. To increase working capital, some alternatives are as follows:
Optimize cash flow
Good financial management involves the thorough control of everything that comes in and out of the cashier. Thus, one can identify which expenses are generating the desired effect and which can be reduced or even eliminated from the operation.
Supplier
Depending on the branch of activity, it is possible to get good negotiations with suppliers. Discounts, bonuses, larger payment deadlines, all this favors the financial cycle and is positively reflected in working capital.
Carry out good inventory management
The example of the sporting goods store has shown that a fault in inventory management can bring financial problems to the company. To prevent working capital from being stopped in stocks, it is important to ensure the turnover of these items.
Have adequate lines of credit
Even though the company operates with its own working capital, it is important to have in a financial institution that offers good credit lines, either for any eventuality or even to take advantage of some punctual business opportunity.
as an anticipation of receivables, installment capital, or even credit with guarantee of financial investments, when partners have investments in XP.
Depending on the need and profile of the company, there will be one or another line of credit.
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