Countless companies face the challenge of closure daily. In many cases, they barely reach one year of operation before ending their activities. One of the main reasons that directly affects many businesses’ health and survival is linked to the lack of organization and financial planning. If finances are not up to date, investments in the medium and long term will likely be affected, and the enterprise will go into deficit.

However, many entrepreneurs are unaware that working capital has a large share in the cash flow situation and the company’s sustainable operation. We have prepared some clarifications that can help you understand what working capital is and how it can influence your business’s success.

What is working capital?

Working capital is a reserve of resources used to meet a company’s financial needs over time.

More simply, it is the money needed to keep your business running. Working capital is everything that can be easily converted into financial resources (high liquidity) to maintain the company’s smooth operation. Therefore, it differs from fixed investment, which is less liquid.

Why is it important?

If the company maintains reasonable control of its finances and knows exactly how much working capital it has, it can:

• Pay short-term bills to maintain positive cash;
• Maintain asset and liability accounts in proper balance;
• Meet the needs for carrying out operational activities;
• Allow the creation of wealth in the company in the long term.

How to calculate working capital?

The determination of the working capital required for your business begins with good planning, detailing the costs and expenses in the short and medium terms and the possible inflows of money to cover these expenditures.

For the calculation of working capital, there is a simple formula that can be adopted for any business:

LWC = CA – CL

Where:

• LWC (Liquid Working Capital) refers to net working capital and all resources, whether to a greater or lesser degree, which must be controlled so that the entrepreneur is not surprised by negative results.
• CA (Current Assets) refers to current assets (cash, banks, accounts receivable, and many other resources).
• CL (Current Liabilities) corresponds to the facts of current liabilities (accounts payable, loans, suppliers, among others).

Tips to maintain working capital

To maximize available working capital, here are some tips:

1. Identify and cut spending

Identify costs and expenses that you can reduce or cut without affecting the productive capacity of the business.

2. Cash flow

Always be aware of the cash flow of the business to keep your finances up to date.

3. Negotiation with suppliers and customers

Concerning suppliers, look for the best payment form, either with an extended-term free of charge or in cash, if the discount is impressive.

Try to match the receipt of sales from customers with payment to suppliers.

In conclusion

To maintain your business’s financial health, you must always be attentive to the management of working capital, ensuring not only the survival but also the success of your company!