Net Working Capital Concept
Working Capital is a financial indicator and designates the set of all assets and liability values associated to the short term cyclical changes and whose normal destination at the end of each exploration cycle is its reuse in new cycles. By other words, working capital isn’t more than part of the current assets connected to the exploration activities but it’s out of the creditors’ short term demands and may be calculated as the difference between the Current Assets and the Short Term Liabilities. From this definition it’s easy to conclude that the company should present always present a certain level of working capital that grants a safety margin that allows permanently suiting the assets transformation rhythm to its creditors’ demands.
The variables that influence the Working Capital value are several and should be taken into consideration when looking to establish which its optimal value:
- Exploration cycle length: in an industrial company the exploration cycle is normally bigger than in a commercial company due to the time consumed in manufacturing;
- Activity’s nature: in certain companies and sectors resorts more to outsourcing, or to advances to suppliers, etc.;
- Payments and receipts policy – each company defines its own loans to customers policies (deadlines for receipts) and negotiates its own payment deadlines;
- Probability level of occurring extraordinary situations that influence the exploration cycle like the possibility of strikes, breakdown of machinery, irrecoverable debts, economic environment, etc.
