Theoretically, we could say that current capital is the result of subtracting current assets and current liabilities. It sounds like a simple definition, but there's more to it than meets the eye, isn't there? In today's article we clarify the concept of working capital and also explain what these calculations are used for in the normal day-to-day running of your business. Shall we get started?
In financial jargon, current capital is the capital whose sum is calculated as follows subtracting a company's current assets and current liabilities. Let us clarify what each of these terms is:
In very colloquial terms, we could say that current or current assets are hard cash available to a company at any given time and in the short term.
These current assets consist of both hard economic capital and those assets which can be converted into liquid money within a period of less than 12 months. They would form part of a company's current assets, for example, invoices that have not yet been paid by customers, money deposited in bank current accounts, stocks of products for sale in the warehouse, etc.
Current liabilities are the capital that the company owes to its suppliers of products and services, to the coffers of the public administration and to banks, to its own employees in the form of personnel costs, etc.
Both a company's current assets and current liabilities must be shown in the company's Balance Sheet, a document that the company's administrative staff (or the external consultancy contracted) draws up following the guidelines set out by the Spanish General Chart of Accounts (PGC or Plan General de Contabilidad), the legal text that sets out the rules that all companies in Spain must follow when preparing and keeping their accounts up to date. Click here to access the official document containing the PGC for small and medium sized companies published by the ICAC (Instituto de Contabilidad y Auditoría de Empresas. Ministry of Economy and Business of the Spanish Government).
Current capital also goes by other names such as, e.g. revolving fund, working capital or working capital (working capital in English). It is called by these names for its functionalityThe company can respond in the short term to the debts it has incurred in the course of its business and thus be able to meet its production cycle in a completely normal way. We are talking about a term that will probably sound very familiar to you: solvency. If we have a healthy current capital, our company will have a good solvency and will be able to assume the various debts and obligations that are part of the production cycle.
Another interesting benefit: knowing the current capital available at any given time is particularly useful for be able to meet debt repayments that our company has acquired with its product and service suppliers. From this point of view, we could also say that calculating current capital is a preventive measure that can prevent our company from becoming undercapitalised and no longer be able to pay its debts, which, as you can imagine, is extremely risky in any employment sector.
Did you know these facts about current capital and is the concept clear to you? Go ahead and tell us what you think.
