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's clarify what each of these terms is:
Explained very informally, we could say that current assets are hard cash available to a company at any given time and in the short term.
This current asset is made up of both hard, pure economic capital and those goods that can be converted into cash within a period of less than 12 months. They would form part of a company's current assets, for example, the invoices that customers have not yet paid, the money deposited in bank current accounts, the stock of products for sale that are in the warehouse, etc.
The current liabilities or working capital are the funds that the company owes to its suppliers of goods and services, to the Public Administration coffers, to banking entities, 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 contracted external consultancy) prepare following the guidelines set 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 that includes the PGC for small and medium-sized enterprises published by the ICAC (Institute of Accounting and Company Auditing. Ministry of Economy and Business of the Government of Spain).
Working capital is also referred to as, for example, working capital, operating capital or working capital (working capital Receive these names precisely for its functionalityso that the company can respond in the short term to the debts it has incurred due to its activity, and thus can meet its production cycle with total normality. We're talking about a term that will surely sound very familiar to you: solvency. If we have healthy working capital, our company will have good solvency and will be able to meet the various debts and obligations involved in being part of the production cycle.
Another useful function: knowing the current capital we have available at any given moment is particularly useful for be able to meet debt repayments which our company has acquired from its product and service suppliers. From this point of view, we could also say that Calculating working capital is a preventative measure that can prevent our company from becoming undercapitalised and no longer be able to pay its debts, something which, as you can imagine, is extremely risky in any work sector.
Did you know these facts about working capital? Is the concept clear to you? Go ahead, tell us your impressions.
