How to calculate working capital
Working capital – a combination of cash and liquid assets that are necessary to finance the activities of the company. Knowing the amount of working capital, you can more effectively manage the company and make investment decisions. The value of working capital characterizes the ability and speed of repayment of the current obligations of the company. If the company does not have working capital or is very modest, then most likely it will not be successful. The calculation of working capital is also useful for evaluating the efficient use of company resources. [1] Formula for calculating working capital:
one
Hang current assets. Current assets are assets that can be converted into cash within one year. Such assets include cash and short-term capital. For example, accounts receivable, deferred expenses and stocks are current assets.
As a rule, current assets and their total value are indicated in the balance sheet of the company.
If there is no total value of current assets in the balance sheet, review the entire report and find the items related to current assets. Add the values of the items corresponding to the definition of current assets to get the total value of current assets. For example, add the values of the following items of the balance sheet: “Accounts receivable”, “Warehouse stocks”, “Cash and cash equivalents”.
2
Calculate current liabilities. Current liabilities are liabilities that must be repaid within one year. Current liabilities are fixed liabilities, payables and current liabilities. [4]
As a rule, current liabilities and their total value are indicated in the balance sheet of the company. If in the balance sheet there is no total value of current liabilities, review the entire report, find the items related to current liabilities and add their values. For example, add the values of the following items of the balance sheet: “Accounts payable”, “Unpaid taxes”, “Short-term loans”.
3
Calculate working capital. To do this, subtract the value of current liabilities from the value of current assets. [5]
For example, the current assets of a company are 50,000 rubles, and current liabilities are 24,000 rubles. The working capital of this company is 26,000 rubles. Thus, this company can repay its current liabilities at the expense of current assets, while retaining cash that it can use at its discretion, for example, to finance current operating activities, to repay a loan ahead of schedule or to pay dividends to company shareholders .
If current liabilities exceed current assets, then there is a deficit of working capital. [6] A deficit in working capital can lead to company insolvency. In this case, the company will have to look for other sources of long-term financing. The deficit of working capital indicates the difficult financial situation of the company; investing in such a company is not recommended.
For example, the current assets of the company are 100,000 rubles, and current liabilities are 120,000 rubles. The deficit of working capital of this company is 20,000 rubles. That is, the company is not able to repay its current liabilities and must sell part of its core assets (in the amount of 20,000 rubles) or find other sources of financing.
Understanding and managing working capital
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Calculate your liquidity ratio. To analyze the financial condition of the company, many financiers use the current ratio. To calculate the current liquidity ratio, you need to know current assets and current liabilities, but as a result, you will not receive the amount in rubles, but the coefficient.
The coefficient compares the values of two quantities relative to each other. To calculate the coefficient, the simplest division operation is used.
To calculate the current ratio, divide current assets into current liabilities. Thus, the current ratio = current assets ÷ current liabilities.
In our example (in the first section of this article), the current ratio of the company: 50,000 ÷ 24,000 = 2.08. This means that the size of the current assets of the company is 2.08 times the size of the current liabilities of the company.
2
Analyze the financial condition of the company using the current ratio. This ratio characterizes the company’s ability to repay its current financial obligations.
