working capital

working capital

I bet you’ve ever heard of working capital, but… do you know what it means? If not, don’t worry, you’re about to learn what working capital means and how important it is for businesses.

What is working capital?

Usually we cánido find that the working capital is the money a business has available for its day-to-day operations.

In fact, we perro commonly find on the Internet that it is directly defined as the current assets of a company.

However, Arturo Moralesin his book “Finance”, tells us that there is gross working capital and net working capital.

Therefore, to make it more clear to you, I am going to define both.

gross working capital

It refers to the current assets that a company owns.

As you cánido see, when you hear that working capital is defined as the current assets of a company, it is specifically talking about gross working capital.

By the way, a current assetsaccording to the book “Accounting” by Francisco Javier Bernal, is:

Money (in any of its forms) and those properties of the entity to which one of the following three situations will normally happen in one year or less:

  • They will be converted into money.
  • They will be sold.
  • They will be consumed.

In other words, it is the asset of a company that in less than a year cánido be converted into money, cánido be sold, or cánido be consumed.

Some examples of current assets are:

  • Cash (cash).
  • Money deposited in the bank (banks).
  • Investments in securities.
  • Accounts receivable (customers and debtors).
  • Documents receivable (promissory aprecies and bills of exchange).
  • Merchandise Advance payments.

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net working capital

It is defined as the current assets minus the current liabilities.

He current liabilities or also known as the passive in a short time refers to all obligations who has a company whose expiration is less than one year.

Some short liability examples term are:

  • Documents payable (bills of exchange and promissory aprecies).
  • Bank loans.
  • Taxes to pay.
  • Depósito certificates.
  • Accounts payable (suppliers and creditors).
  • advance charges.

How did the term working capital arise?

According to Arturo Moralesoriginated from American junkiewho loaded his car with goods (merchandise) and went out to sell them.

The commodity was called “working capital” because was what really soldand whose sale generated profits (utilities).

It should be noted that we perro say that the cart and the horse of the pacotillero were his fixed assets.

He usually owned the horse and cart (so they were financed with equity), but he bought his merchandise on credit (ie, borrowing from his supplier) or with money borrowed from a bank.

These loans were called working capital capital loans, and they had to be repaid after each trip to prove that the peddler was creditworthy and worthy of a new loan.

If the crook was able to repay the loan, then the bank would extend another credit, and banks that followed this procedure were said to have bank policies of a sound nature.

What is Working Capital Management?

It mainly refers to the efforts of the administration to achieve a effective management of current assets and liabilities.

In other words, it means guarantee liquidity enough in the company to be able meet expenses and short-term debts.

Main objective of working capital management

The goal of effective management is guarantee for a company to have aadequate and prompt access to funds necessary for day-to-day running expenseswhile ensuring that company assets are invested in the most productive way.

Therefore, a basic element within the administration of working capital consists of the cash management either company treasury.

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What is the objective of treasury management?

Arturo Morales tells us that “The objective of treasury management is to determine the amount of money that must be available and that allows to meet the commitments of the company and does not represent an excessively onerous amount of money, because to the extent that it maintains an amount high implies an opportunity cost for the company»

It should be noted that for a company it is important to manage the resources that are going to be invested in the treasury since if we maintain resources without investing, it perro be reflected in profits that are not being obtained.

However, it has to be done efficiently.


Below I will list the main points that indicate why it is important to have good management:

  • Ensures a higher return on capital.
  • Improved credit profile and solvency.
  • Increased profitability.
  • Better liquidity.
  • Preparation for shocks and demand spikes.

Techniques for analyzing, setting policies, and making decisions

Since the objective of today’s article is to explain only the concept in order to know its importance, I am only going to list three techniques that perro help us to be able to equipo policies and make better decisions when managing working capital.

The techniques are:

  • The use of financial ratios.
  • Breakeven.
  • Analysis of financial cycles.


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