Working capital is an essential financial indicator to ensure the success of a business. This is the sum of money available in your treasury which makes it possible to pay current operating expenses and therefore to support your company. This therefore corresponds to a safety maneuver step. Discover here the working capital calculation method and its interpretation.

WHY CALCULATE WORKING CAPITAL?

Working capital is money that is owned by a business over the long term to finance its day-to-day operations . This sum is created through the operation of its activity or made available by investors, financing organizations or associates . The working capital calculation therefore makes it possible to measure the quantity of stable resources available to meet disbursements while awaiting receipts. The amount obtained must thus make it possible to finance the need for working capital or WCR, the purpose of which is to maintain the operating cycle. If you want more information on working capital calculation, follow this link.

HOW TO CALCULATE WORKING CAPITAL?

Moreover, it is necessary to give explanations on the latter. First of all, shareholders’ equity concerns the capital contributions made by issue premiums, company reserves, associates, other shareholders’ equity and provisions. Then, debts include loans as well as partners’ current accounts based on the medium or long term. Finally, fixed assets correspond to:

tangible fixed assets : land, buildings, equipment, vehicles, etc. ;

intangible assets : patents, trademarks, goodwill, software, etc. ;

financial fixed assets : sureties, equity securities, etc.

THE INTERPRETATION OF THE GOODWILL

Once the calculation of the working capital is done, you can have:

POSITIVE WORKING CAPITAL

This means that your business generates resources that can be used to finance its long-term needs. It also has enough resources to cover certain financial risks  linked to its activity, such as customer default or a reduction in the payment period for suppliers.

NEGATIVE WORKING CAPITAL

In this case, your company does not have enough resources to meet  short-term disbursements. It is therefore essential to find new financing to restore working capital. You can, for example, opt for a contribution in a partner’s current account, a contribution in social capital or even a subscription to a loan.

ZERO WORKING CAPITAL

This is nil when your company has enough resources to finance these long-term investments. On the other hand, it cannot cover the current expenses related to its activity.

HOW TO CALCULATE THE WORKING CAPITAL REQUIREMENT?

The working capital requirement is calculated using the following formula:

WCR = average inventory + trade receivables – trade payables .

If this is negative, it means that you pay your customers before your suppliers. Otherwise, your financial situation is in bad shape and you pay your customers after your suppliers.

HOW TO MANAGE YOUR WORKING CAPITAL REQUIREMENT?

To control your working capital, you must update your accounts , limit your customer payment terms, negotiate better terms with suppliers and keep your stocks in line with reality.