Working capital is a quite familiar concept, mentioned many times in business activities of enterprises. So what is working capital ? How to calculate working capital? How to manage this index well? If businesses are also interested in this issue, let's find the answer with 1C Vietnam in the article below!
Working capital can be understood as a financial measure that represents an organization's available resources. Working capital includes short-term assets or assets that are regularly circulated during the business process to meet business activities such as: payments to suppliers, money to spend on electricity, water, and electricity costs. diplomas, employee salaries, etc. Working capital is often expressed in the form of: Cash, supplies, goods, highly liquid securities, short-term receivables, etc.
Calculating working capital will help administrators understand the financial situation of the business as well as investment and production activities, etc. Specifically:
Besides understanding what working capital is , administrators need to understand the working capital formula to report financial activities. Below is the basic working capital calculation formula:
Working capital = Current assets/Current assets – Short-term liabilities
In there:
For example: Company A has short-term debt of 1 billion VND and short-term assets of 2.5 billion VND.
From there it can be calculated: Working capital = 2.5 billion - 1 billion = 1.5 billion VND.
So the working capital of company A is 1.5 billion VND.
Depending on the business form of the enterprise, administrators can choose different criteria to classify working capital. Below are suggestions for detailed classification based on three criteria: economic characteristics, sources of formation and production and business activities.
Working capital can be classified based on its economic characteristics as well as its convertibility. When using this criterion, working capital would include:
Working capital can be mobilized by businesses from many different sources. Therefore, based on this criterion, managers can divide working capital into the following types:
Some businesses use criteria related to the production and business process to classify working capital. Specifically:
Based on the knowledge of understanding what working capital is , how to calculate and classify it, it can be seen that this is one of the important criteria in the financial activities of a business. So what exactly does working capital mean for each business? Let's find out in the section below!
Working capital is an available financial source that businesses can use in investment activities as well as expanding production and business models. If a business has sufficient working capital, it can continue to buy raw materials, invest in equipment, carry out communication campaigns as well as pay employees.
In addition, when a business needs a loan, proving financial stability through a good amount of working capital can also help easily meet the conditions of banks or investors.
Right in the concept of understanding what working capital is , it can be seen that this is a source of capital used to pay short-term debt for businesses. Ensuring short-term liquidity is extremely important because this index will directly affect the business's reputation with its partners. In addition, maintaining business health means controlling positive working capital to ensure smooth, uninterrupted production operations.
Working capital is a necessary condition for businesses to maintain business activities and develop sustainably. Based on this index, administrators will have an overview of the financial capacity of the business as well as predict risks that may occur in the future. From there, businesses can come up with plans to maximize profits and better manage risks.
Working capital is a flexible index that can change over time and depends on many surrounding environmental conditions. Therefore, when managing working capital, businesses may encounter some of the following challenges:
One of the huge challenges that any business can encounter is a shortage of working capital. This often happens when the health of the business is weak and the amount of liquid assets is not enough to meet debt payment needs. The cause of this may come from increased costs, decreased revenue or difficulty in debt collection.
Inventory management greatly affects a business's working capital. If the amount of inventory is too large, it can cause high storage costs, the risk of not being able to sell the goods due to out of fashion, expiration date, etc. Meanwhile, if the amount of inventory is too little, businesses can risk Lost opportunity if market demand increases. Therefore, businesses need to have a detailed inventory management strategy to minimize costs while still meeting market needs.
Debt is one of the factors that form a business's working capital, but debt collection can be difficult due to late or non-payment by customers. This greatly affects the ability of businesses to reinvest and pay off short-term debt.
For businesses with international transactions, fluctuations in exchange rates and interest rates will have a strong impact on working capital. This volatility can increase borrowing costs as well as the value of foreign currency receipts.
Rapid growth of a business can put pressure on working capital due to increased spending needs to serve expansion activities. Although businesses aim to develop and grow strongly, without a good management plan, too fast a growth rate can lead to a shortage of cash in the business.
To manage working capital well, businesses can refer to 1C:Company Management software - an effective management solution with features to automate business administration. The software possesses many small modules, allowing to connect all Purchasing - Production - Finance - Warehouse - Sales - CRM - Human Resources departments on the same unified platform. In particular, all features have the ability to self-adjust to suit the activities of each organization and business. Applying technology solutions to working capital management can help businesses save up to 60% of working time as well as improve efficiency during the actual implementation process.
One of the reasons why 1C:Company Management is considered an effective solution to support working capital management is that the inventory management module is intelligently designed with many special features:
Hopefully through the above article, your business will have more useful information to answer the question of what working capital is . If you have any questions related to calculation formulas, classification or the use of software to improve working capital management efficiency, please contact 1C Vietnam immediately for support.