What is working capital? What role does working capital play in a business? Distinguishing working capital from fixed capital is the way to help your business operate and operate most efficiently. Please “pocket” immediately for yourself these knowledge.

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1. Working capital and things you should know

1.1. Do you understand what “Working capital” is

?Working capital is what?

What is working capital? This is an English phrase to talk about working capital. So what should we understand working capital? Working capital is a source of short-term capital used in a short time to serve the business activities of a business on a daily basis. Take specific examples to make it easier for you to imagine such as: working capital is cash, products, inventory, and receivables for a short period of time, daily or weekly.

* Working capital – working capital is measured according to the following formula:

Net Working capital (net working capital) = Current assets (current assets) – Current liabilities (current liabilities)

We will explain from the phrase in the above formula to make it easier for you to figure it out:

Current assets – Current assets are assets that have a short shelf life, short-term turnover, or short-term recovery. Duration will be less than 12 months, or for the duration of a business cycle. Including the following types of short-term assets: assets in circulation such as commodities; assets in production such as raw materials; financial assets such as investments in short-term securities. Or, short-term assets can be divided into: cash, short-term financial investments, inventories, other short-term assets, and receivables. Short-term assets are calculated by the formula:

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Current assets = cash + accounts receivable + inventory + other current assets

+ Current liabilities – short-term liabilities are debts with a value and repayment term of less than 12 months or less than 1 business cycle of any business. Common short-term liabilities include internal payables, trade payables, and principal lease liabilities. Businesses often use their short-term assets to pay for their short-term liabilities. The formula for calculating short-term debt is as follows:

Current liabilities = Liabilities + accruals + short-term loans + other short-term loans

The types of working capital differ when the business type of businesses is different. Taking the specific example of a business operating in the form of a retail business such as a supermarket, the time to collect money is extremely short, and the time to pay to houses of the same level is longer, and the reserve period is very short. Inventory is quite long because the selling power of businesses is different and the purchasing power of consumers is also different.

* Classification of working capital of any enterprise is as follows:

+ Based on the role of working capital: working capital is still in the reserve stage, the production stage, the circulation phase.

+ Based on the form of expression: capital, materials, goods; capital in money

Through this classification to help businesses assess the level of inventory and solvency of that business.

A business has incentives and profits but has a low solvency when the assets of the business are not easily converted to cash. Working capital of a business greater than zero will be essential to ensure that the business can continue to operate normally and has sufficient funds to meet its short-term liabilities and operating fees. enterprise.

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1.2. Some related concepts

* What is working capital management?

Working capital management – ​​working capital management is an activity in the business process of an enterprise. And working capital management through two main activities is working capital management planning and short-term financial control of the business. With this management activity, it is to ensure that the business has enough capital and resources to serve and meet daily business activities and increase profits for the business.

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* What is gross working capital?

Gross working capital – total working capital is the total assets of that business at the present time. Total working capital includes cash, inventory, accounts receivable and short-term investments. Debts are not included in the total working capital. Total working capital only assesses a part of that business’s finances.

* What is working capital turnover?

Working capital turnover – working capital turnover refers to the life cycle of an enterprise’s business, which is the number of days it takes for a business to complete its business. To evaluate the business performance of your business, you need to rely on the working capital turnover ratio. The larger the turnover, the more capital used by the business, the better. On the contrary, when the working capital turnover is less, the business is in a state of slow capital conversion and the ability to circulate goods. corporate culture is poor, business efficiency is not high.

1.3. What is the difference between working capital and fixed capital?

? show, target, categorize.

* Concept

What is working capital or working capital? As mentioned above, we can see that: is the capital of the enterprise in a short time, expressed in cash of short-term assets and is governed by short-term assets.

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What is fixed capital? Fixed capital is the fixed asset of that enterprise, is the value of fixed assets such as assets of great value, and has a long and usable life over the business cycles of the enterprise. enterprise.

* Featured

Working capital:

+ fast switch

+ Teleport once in the course of business

+ When a business round is completed, the working capital is also completed

+ Mobilize in a closed cycle and through the movement of the cycle to evaluate the solvency of an enterprise and evaluate the efficiency of business operations along with the efficiency of capital use in the process business

Fixed capital:

+ Cycle through multiple cycles

+ In business activities, fixed capital is divided into 2 parts: Depreciation value of fixed assets and residual value of fixed assets.

* Expression

Working capital: Current assets

Fixed capital: Fixed assets

* Targets

Working capital: cash, receivables, cash equivalents

Fixed capital: Fixed assets of the business

* Classification

Working capital:

+ By role: Working capital in production reserve stage, in production, in circulation

+ By form: Cash, materials, goods, prepaid expenses

Fixed capital:

+ Classification by expression: Tangible fixed assets of the enterprise, intangible fixed assets

+ According to usage situation: Assets in use, assets not in use, assets not in use and awaiting liquidation.

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By comparing and clarifying the criteria of working capital and fixed capital, it helps you understand and distinguish these two capital from each other in the business.