The working capital is a term synonymous with the more widely used “working capital”. Working capital is a long-term magnitude that is obtained using the following formula: long-term resources or permanent capital (net worth + non-current liabilities) – non-current assets:
FM = (PN + PNC) – ANC
The working capital expresses the part of long-term resources that finance short-term assets. Its meaning is very important: part of the long-term financial resources will be used to finance current asset items (treasury, customers, inventories, etc.).
Long-term resources must be dedicated in the first place to finance long-term assets. If the long-term resources are greater than the long-term assets to be financed by them, the surplus will be used to finance the short-term assets. Its advantage is that said funds will be materialized in money (via marketing and collection of stocks, for example), before they have to be returned to those who contributed them.
In general, companies with positive working capital will be in a better position to meet their short-term financing needs without causing treasury stress for the company.
The working capital, therefore, is a long-term magnitude. Its modification is very expensive in the short term, since it implies changes in items such as social capital, long-term loans or fixed assets. All of them have to do with financing or investment decisions, which, as mentioned above, contain a high level of complexity for the company (include corporate, legal, strategic aspects, etc.), and, generally, involve high volumes. economic.
Decisions that increase working capital are:
• Capital increase (with or without share premium).
• Taking long-term loans.
• Issuance of obligations and bonds.
• Self-financing (retention of profits).
• Disposal of fixed assets (tangible, intangible or financial).
• Reclassification of fixed assets in non-current assets held for sale.
Decisions that reduce working capital are:
• Capital reductions.
• Amortization of long-term bank debt.
• Amortization of obligations and bonds.
• Reclassification of debt from long to short term due to maturity.
• Payment of dividends.
• Acquisition of fixed assets (tangible, intangible or financial).
Decisions that do not alter the working capital are:
• Reclassification of property, plant and equipment in real estate investments.
• Conversion of debentures into shares.
• Subscription of capital without callable payment.
In general, the company improves its position by having more long-term financial resources to face the financing of short-term assets.
According to the principle of double entry, in any balance, the current capital must be equal to the working capital. This has generated confusion on numerous occasions, considering that the definition of working capital is the difference between current assets and liabilities.
This conceptual error must be corrected, since the fact that working capital and current capital coincide does not mean that they are the same thing. The working capital is made up of long-term financial resources that are used to finance short-term assets, and current capital represents short-term assets that are financed by long-term resources. Although both items quantitatively represent the same magnitude, the meaning of both magnitudes is completely different. The working capital supposes long-term financing; and current capital, investment in short-term assets.
EXAMPLE
Let the following data be from a balance sheet:
It is requested:
Determine the working capital for the years 2000 and 2001 and comment on its evolution
Solution:
The working capital is determined each year according to the equation:
FM = Long-term resources (PN + PNC) – Non-current assets.
Comment:
The working capital of “PLT, SA” has grown appreciably between 2000 and 2001 as a result of raising long-term debt (+230 thousand euros), which faces the decrease in reserves due to negative results of the year 2000. Said increase, in addition to wiping out the decrease in net worth, makes it possible to meet the investment needs of non-current assets (which grows by +50 thousand euros). The remaining balance (+230 thousand euros) will be used to finance the company’s current assets.
In general, the company improves its position by having more long-term financial resources to face the financing of short-term assets.
Facebook Comments
Disqus