Working capital is an essential indicator for assessing a company's financial situation. It expresses the difference between the durable and stable resources of a company and all of its fixed assets. Working capital refers to the sum of money that the company must permanently hold to support its disbursements while waiting for possible receipts.
The usefulness of working capital can be summed up in the company's ability to develop a view of its resources and quantify them in order to finance its activity. The value of the working capital must both make it possible to meet the Working Capital Requirement (BFR) but also to secure the operating cycle.
BFR: amount necessary for operating expenses.
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FR: amounts held by the company to finance operating expenses.
In practice, the FR is calculated as follows:
FR= (Equity + medium and long-term borrowings) – Fixed assets
Calculating your company's working capital is good, but interpreting it is even better!
Indeed, after calculating the working capital, it is wise to analyze and interpret it. Three scenarios are possible when calculating this indicator:
Positive working capital: in other words you have a cash surplus and your business has sufficient resources to meet its possible needs.
Negative working capital: this means that your business is in need of financing and does not have sufficient resources to support its future needs.
Zero working capital: your company has the possibility of financing its investments but cannot cover the expenses relating to its activity if necessary.