Working Capital
Working capital is the total capital in terms of money or assets that is available in hands of a company after clearing all its liabilities. It is simply a measure of a company’s efficiency. Like if a company has more working capital it implies that the company is financially stable.
It improves the credit worthiness of a company to avail the loan. Banks evaluate using these figures to measure the company’s efficiency to repay the loan amount though their production fails.
How to calculate Working Capital?
In the economic context
Working Capital = Current Assets – Current Liabilities.
- So if the company has more assets than liabilities then it is called as Excess Working capital, which is a good thing because it helps the business to grow.
- If the company is having more liability than asset, it is called as Working capital deficit. To compensate this deficiency the production must be more.
Ratios to Look
It is the ratio between assets and liabilities which will imply whether company has the ability to pay their debts with current assets
- If this ratio is less than one, then the company is said to have a negative Working capital
- But if the ratio is very high it indicates that the company possess excess assets which necessarily may not be available as ready cash to flow. Which means excess assets may be land, or building.
How to manage it?
Working Capitals can be improved and managed by focusing on the following :
- Managing Inventories- means managing list of stocks, goods etc
- Managing income and outgoing money
- Managing the total cash flow
