The definition of working capital, also known as working capital or revolving fund, are the financial resources long-term that a company requires to develop its activity in the short term.

The concept of working capital is also understood as the part of the current assets It is financed through long-term resources and which come from permanent capital, such as financing credits and net worth.

The working capital is necessary for any company to know the ratio of liquidity. The calculation of the working capital can help ensure the survival of a business, also increasing its profitability.

## How to calculate working capital

First, it is necessary to specify what current liabilities and current assets are made up of.

- Current liabilities are obligations payment in a short period of time, less than a year.
- Current assets refers to any liquid asset such as treasury or stocks.

The calculation of the working capital can be done in two ways. By means of either of these two formulas the same result will be achieved.

- From the perspective of long-term financing: permanent resources (non-current liabilities and net worth) minus non-current assets. Therefore, FM = (PNC-PN) - ANC
- From the point of view of short-term financing: current assets minus current liabilities. FM = AC - PC

Tool to calculate working capital

Depending on the result, there are three assumptions:

- That is positive: therefore a perfect situation of financial equilibrium is produced. The company will have the option of meeting its payment commitments in the short term.
- Make it negative: current assets are lower than liabilities. There is a situation of economic imbalance. The company will have problems to pay debts, with the risk of filing in suspension of payments.
- Equal to zero: current assets and current liabilities are equal. However, it is considered to be in a somewhat dangerous situation, since the current assets are financed with short-term loans in its entirety and if there were a delay in payment, it would not have the capacity to meet the payment commitments.