Working capital

Working capital, also known as net working capital, is a term used to describe the amount of funds a company has available in order to run its day-to-day operations and meet its short-term obligations. It represents the difference between the company's current assets and its current liabilities.

Working capital is the amount available to the company for financing its day-to-day operations and its running obligations. It includes cash, trade receivables, inventory and other current assets, as well as current liabilities such as trade payables, short-term loans and other current debt.

How it is calculated

Working capital is calculated by subtracting the company's current liabilities from its current assets. The formula is as follows:

Working capital = Current assets – Current liabilities

What is it used for?

Working capital is used to finance the company's operating cycle and to ensure that it has sufficient liquidity to meet its day-to-day operating costs, pay suppliers and maintain healthy operations. It is also an indicator of the company's short-term financial health and liquidity position.

Tips for managing working capital

1. Make the collection of receivables more efficient: Implement strategies to ensure that trade receivables are paid quickly, for example through efficient invoicing and collection processes.
2. Optimise inventory management: Avoid overstocking and implement strategies for reducing storage costs and the risk of obsolete or impaired goods.
3. Negotiating strategies with suppliers: Negotiate favourable payment terms with suppliers in order to obtain longer credit periods and improve liquidity.
4. Control of operating costs: Monitor and reduce unnecessary operating costs in order to free up funds and improve working capital.
5. Optimise cash flow management: Implement effective cash flow management strategies to improve cash receipts and extend the payment deadlines for cash disbursements.

Effective management of working capital is decisive for the company's financial health and liquidity position. By having sufficient working capital available, the company can maintain healthy operations, meet its short-term obligations and have the flexibility to exploit growth and investment opportunities.