Working capital is what a company needs to carry out its daily activities. In other words, working capital refers to the financial resources necessary to keep your productive process in force , the one that generates the resources that serve to cover your investment. In this way, the activity of a productive organization can be seen as a series of cycles of utilization and recovery of its capital. These cycles can have varying degrees of breadth and length in time, so much of it depends on the size of working capital needed to keep the business flowing .
Meet short-term needs
Every company needs to meet its essential expenses such as paying taxes, salaries and other services. These elements are the ones that really make it possible to carry out the process of recovering your capital, the one that will be carried out through the payment received from your customers. In case the company needs more capital than it has, it can go bankrupt, so it will be necessary to obtain external financing at an interest rate that it can meet.
working capital cycle
The dependence of the operation of a company in relation to its capital needs to evaluate the conditions that will be submitted with respect to its consistent cycle in the issue of producing and paying its debt. This cycle is called working capital because it accounts for your main and lowest expenses for twelve months.
The longer this cycle, the smaller the working capital needed; on the contrary, the shorter the cycle, the greater the working capital. The reason for this circumstance is obvious, the company must spend more time before charging for what it produces.
a crucial concept
The working capital concept is of great importance to understand the functioning of a company and enable them to arouse liquidity problems that are harmful to their activities. In fact, maintaining liquidity is an important objective even though we know that there are mechanisms for a temporary break situation to happen. However, there are circumstances that occur that can be detrimental, for example, from high inflation. In this context, it is possible that part of the working capital is lost, which requires a careful observation of finances .