A business requires different types of capital in order to operate. Working capital is often considered to be the most significant types of capital; it is claimed that the amount of this can determine the success of the company. Working capital is a type of liquid asset that can be used to build a company. The amount of working capital available to a company can be an amount that is positive or minus; in other words a company can have less than zero working capital. If a company has more debts than current assets then this will mean that they have a working capital that is a minus number.
What is Working Capital?
Working capital is the amount of current capital that a business has left after all the liabilities have been subtracted. These liabilities usually involve any money that needs to be paid during the fiscal year. It can include all the money that needs to be paid to those providing services and materials. It will also include any debt. If the debt is long-term then current liabilities might only include the payments that are due within the fiscal year.
Most companies will have a lot of assets, but not all of these will be convertible into a cash amount. This means that these particular assets will be of little use when it comes to building the company up to increased success. Just because a company finds themselves in this position where they have few liquid assets doesn’t necessarily mean that they can’t be making a good profit. Some companies will be ruined due to a lack of working capital while other businesses can function perfectly well under this type of conditions.
The Effects of Working Capital on Cash Flow
The amount of working capital a company has can lead to different effects. If they have an increase then this should mean that they have more cash available. This is due to the fact that assets have been made more liquid. If here is a fall then this should mean less cash available as more capital is tied up.
The danger of having too little working capital is that it can mean that the business stops functioning properly. All businesses will usually need at least some cash on hand for settling debts and other commitments. If a company then doesn’t have enough working capital then it could mean that they are unable to meet their obligations and it will be downhill from there. Creditors will be knocking on the door and bankruptcy might be the only solution. Even a successful business could find themselves in this position.
Not all businesses suffer too much through lacking in working capital. There are many companies that offer on cash basis. This means that there is a rapid flow of inventory into cash. Due to this quick turnover it is usually easy for them to get their hands on cash to pay all their debts as they arise.