Working Capital

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Working Capital

Working Capital


The most basic definition of working capital is considered as the resources required operating the company. Thus working capital is what is commonly called current assets. Analysis of working capital management is part of financial analysis. The term financial also known as analysis and interpretation of financial statements' refers to the process of determining the financial strength and weakness of a firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative area.

Cash, Short-Term Investments, Portfolio and Inventories

The company in order to operate requires resources to meet needs of inputs, raw materials, labor, replacement of fixed assets, etc. These resources must be available on short notice to meet the needs of the company in time. To determine the working capital in a more objective must be subtracted from current assets, current liabilities. Thus we obtain what is called working capital amount. The formula for determining the net working capital accounting is strongly related to one reason called liquidity current ratio, which is calculated by dividing current assets by current liabilities, and seeks the minimum ratio is 1: 1, since it means that for every dollar that the company should have a weight.

A current ratio of 1:1 means working capital = 0, which indicates that the current ratio should always be greater than 1. It is obvious that if it is equal to 1 or less than 1 does not mean that the company cannot operate, in fact there are many companies that operate with a working capital of 0 or even lower. Having a working capital 0 not mean it has no resources, it just means that their current liabilities are greater than its current assets, and it is possible that its current assets are sufficient to operate, what happens is that, when the current liabilities equal or exceed the current assets, there is a high risk of illiquidity, to the extent that the requirements do not meet current liabilities to be covered by current assets, or the cash flow generated by the current assets (Beranek, 1966).

In this situation, you would cash flow generated by current assets cannot cover short-term obligations and to meet working capital needs, fund this illiquidity is required, which can be done by partners capitalization or by acquisition of new liabilities, not very suitable solution since accentuate the cause of the problem and become a kind of vicious circle.

Working Capital and Cash Flow

Working capital is directly related to the company's ability to generate cash flow. Cash flow or cash, which the company generates, will take charge of maintaining or increasing working capital. The company has the capacity to generate cash with less investment our lower utilization of assets, has great effect on working capital. Is the cash flow generated by the company that generates the resources to operate the company, to replenish the assets to pay the debt and distribute profits to members?

Efficient generation of resources guarantees the solvency of the company to assume the current commitments ...
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