Working capital measures the resources available to the company in the medium and long term (excluding turnover) to finance its current operations. It is also called FRNG for Net Global Working Capital.
More specifically, working capital represents the sum available to the company to pay its suppliers, employees and all of its operating expenses, while waiting to be paid by its customers.
Working capital is an accounting concept. Its vocation is to explain in a quantitative way the use of the company’s money (at least part of this money).
In managerial terms, working capital represents the difference between the long-term resources of the company (permanent capital) and its fixed assets.
Let’s see in more detail how this formula translates into the life of your business.
Composition of working capital
Working capital: on the one hand permanent capital
When you create your business, you put capital into it, that is, money that ends up in its coffers. As you go, you make profits. They can, if you decide, increase the available resources. Finally, you are likely to take out a long-term loan, which is another amount of money available over the long term.
All these resources are called permanent capital; they are defined as the resources available in the long term for your company (they are not to be returned quickly). They are also found in the accounting concept of equity (or equity).
Working capital: on the other hand fixed assets
Fixed assets, or stable jobs, represent the assets of the company (tangible, intangible, financial fixed assets) intended to remain there for the long term. Specifically, the fixed assets are the value of the company’s work tool, as its goodwill, its patents, machinery and equipment useful in the production…
By strictly following each of the concepts mentioned, working capital (difference between permanent capital and fixed assets) measures the quantity of stable resources not used by fixed assets. This “excess money” then makes it possible to cover the company’s current operating expenses, while awaiting customer receipts.
The permanent capital of the company covers the fixed assets. What is left is what is known as working capital, to cover current operating expenses.
A last method exists, more detailed this time:
Stable resources at the top of the balance sheet (capital, income, debts + provisions for charges) – Gross fixed assets, recorded at the top of the balance sheet assets = Working capital.
Calculating a company’s working capital opens up several possible interpretations, which depend on the result obtained. Three scenarios arise: working capital equal to 0, working capital less than 0 or working capital greater than 0.
Working capital: interpretation of the result
Your working capital is greater than 0: your business is in good financial health. It covers its investments over the long term and the resulting surplus covers its entire operating cycle. In this situation, the company has a sufficient safety margin in terms of cash flow.