Working Capital and How it Works

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##### Working Capital and How it Works

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# Working Capital and How it Works

Everyone who wants to start a business must be able to calculate working capital correctly.

How to calculate working capital? Check out the reviews here.

## What is Working Capital?

Working capital is a term in the business world that refers to the level of liquidity of a company and its operational efficiency.

In addition, working capital, also known as net working capital, is a measure that shows the financial health of a corporation in the short term.

The term can be interpreted as “net working capital” and refers to a company’s financial size to calculate the company’s ability to pay bills within one year.

It is essential to understand if a company has a positive working capital value, it means that the company has the potential to grow.

In addition, the company is also a potential investment choice.

However, the total working capital of a company is negative. In that case, the value of the company’s current assets is certain to be smaller than its current liabilities.

It can also signify that the company will find it challenging to grow and pay off its creditors.

## Working Capital Composition Components

The following are the two main components of working capital:

### 1. Current assets of the company

Current assets are the amount of a company’s wealth that can be used to pay operating costs and current liabilities.

It can take the form of cash, unpaid receivables, account balances, product stock, and short-term investments.

### 2. Current liabilities

The next component is current liabilities, which are expenses that must be paid by the company and have a one-year deadline.

Examples are accounts payable, wages, sales tax expenses, insurance costs, and wages payable.

Note advance payments by customers also fall into this category in companies.

## How to Calculate Working Capital

The first step to calculating working capital must be to collect all company asset data.

For example, account funds, company inventory, cash, assets that can be liquidated in less than one year, and pending receivables.

Furthermore, by collecting company liability data, which includes debt claims, employee wages, tax bills, and debt repayments, which have a maturity of at least one year.

## Working Capital Calculation Formula

To calculate the value of a company’s net working capital, the following formula can be used:

Working Capital  = Current Assets – Current Liabilities

Example of Calculation of Working Capital

The following is an example of how to calculate working capital.

Example 1

It is known that company ABC has cash of IDR 10,000,000, trade receivables of IDR 50,000,000, a total inventory of IDR 100,000,000, and trade payables of IDR 20,000,000.

From the financial data above, calculate the working capital of the company.

Formula: Working Capital = Assets – Liabilities

Calculation:

Working capital = (cash + accounts receivable + inventory) – accounts payable

Working capital = IDR 10,000,000 + IDR 50,000,000 + IDR 100,000,000 – IDR 20,000,000

Working capital = IDR 160,000,000 – IDR 20,000,000

Working capital = IDR 140,000,000

Example 2

It is known that the DEF company is engaged in technology and has current assets worth IDR 70,000,000 with liabilities of IDR 30,000,000.

Calculate the value of the working capital of the company.

Formula: Working capital = Assets – Liabilities

Calculation:

Working capital = IDR 70,000,000 – IDR 30,000,000

Working capital = IDR 40,000,000

## Conclusion

Working capital or net working capital refers to the level of liquidity of a company and its operational efficiency.

Referred to as net working capital, this term refers to a measure that shows a company’s financial health in the short term.

If a company has a positive amount of working capital, the company has the potential to grow and can be used as a profitable investment option.

Conversely, if a company has a negative working capital value, it will be easier to grow and pay creditors.

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