Common problems related to working capital

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Generally, when a company has a negative working capital, it is due to poor financial management, where potential short-term expenses are not contemplated or anticipated. It may also be the case that expenses are not controlled and the company ends up with insufficient funds for unforeseen events.

Excess inventory can also result in a lack of liquidity, as this does not allow you to meet an immediate obligation and you depend on the sale of the products. This results in a lack of liquidity and a loss of confidence from your suppliers and potential investors.

On the other hand, the accelerated growth of your activities without bahrain email list adequate financing can result in your working capital not being adequate. In this sense, having a good financial strategy or plan is vital.

Another practice you can implement is to improve negotiations with your suppliers to extend payment terms or receive discounts. You can also take the time to analyze possible future expenses, so that you are prepared for unforeseen events.

Case study
Suppose we have a company with the following current assets and liabilities:

Assets

Treasury: €10,000
Accounts receivable: €20,000
Inventory: €18,000
There are a total of €48,000 in assets.

Liabilities

Accounts payable: €25,000
Short-term loans: €10,000
There are a total of €35,000 in liabilities.

The working capital of this company will be €48,000 - €35,000 = €13,000. The FM ratio will be 1.37.

Its fund is positive, indicating that it has sufficient liquidity, although the resulting ratio could improve to reach a more stable level. To achieve this, some strategies can be applied, such as:

Offer discounts for early payments to have greater control over accounts receivable.
Implement systems to track payments and product stock.
Conduct a return on investment analysis to determine the benefits you are obtaining.
Make investments in fixed assets that help you grow your company's operations in the long term.

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Conclusion
As you can see, knowing and understanding what working capital is is extremely important for your company. These are the resources that will help you meet your company's obligations in case of unforeseen events.

There are many strategies you can apply to manage these resources effectively, although everything depends on the needs of your company. In general, you must have good inventory management, follow up on accounts receivable, make safe financial investments, among others.

We recommend that you periodically review your working capital so that you can have a clear view of the business' liquidity at all times. This will allow you to make better informed decisions in the short and long term.

Frequently Asked Questions
What is operating working capital?
This working capital considers expenses related solely to the operation of the company and the assets held to cover said expenses. In this way, it measures whether the business has the capacity to continue operating without depending on other assets or additional financing.

What is the difference between working capital and net working capital?
The calculation of both factors is done with the same information, but their analysis is different. The working capital seeks to know the immediate liquidity of the company, while the net working capital is a more global concept in the company.