How Do I Determine Working Capital Needs?

Working capital requirements refer to the funds required by the company's current assets, which are still insufficient after being compensated with the company's current liabilities. The part of the funds that need to be raised by the company does not include monetary funds, notes that can be cashed out immediately, and short-term loans that require immediate payment And bills payable. It is the capital necessary for the enterprise to ensure continuous and cyclical production in the production and operation process.

Working capital requirements

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Working capital requirements refer to the funds required by the company's current assets, which are still insufficient after being compensated with the company's current liabilities. The portion of funds that need to be raised by the company does not include monetary funds, notes that can be cashed out immediately, and those that require immediate payment

Working capital requirements = (receivable,

The demand for capital in the production and operation activities of an enterprise is mainly caused by the time difference in the process of capital movement. For example, there is a time difference between income and expenditure, and the future is later; the time difference between the payment and receipt of the enterprise and so on. This time difference is determined by the nature of the company's production and operation activities. Therefore, this funding requirement is a requirement for the normal operation of the enterprise. As long as the enterprise operates, it needs working capital. The factors that determine working capital requirements are: ^[2]

1. Industry characteristics of enterprises. Generally, companies that create low added value (such as commercial enterprises) have low working capital requirements; companies that create high added value (such as equipment manufacturing companies) have long production and payment cycles and large inventory requirements, so they require more working capital. For those enterprises that provide funds for production and operation activities, the focus of fund management is how to use short-term funds, especially idle funds; for enterprises with high capital requirements, the focus of fund management is how to raise funds in a timely and reasonable manner and accelerate capital turnover. Understanding the different priorities of fund management in different industries and enterprises is an important basis for judging the level of fund management.

2. Enterprise production scale. The capital requirements and sources of an enterprise change with the scale of the company's operations, so the demand for working capital will necessarily change with the scale of its production and operations. With the expansion of the production scale of enterprises, it is usually the case that the contradiction between capital requirements and capital supply of enterprises has become more prominent, causing an increase in working capital requirements. The main reasons for this are: tight funding sources, increasing corporate interest burdens; unreasonable capital occupations, and a large amount of capital precipitation.

3 Changes in the market. During the period of rising prices, the demand for working capital will increase. For industrial enterprises, on the one hand, due to the increase in current liabilities, it is not enough to offset the increased capital requirements of raw material prices. increase. In the case of slow sales of enterprise products, capital occupation does not decrease immediately, and it may also increase the demand for working capital.

4 Enterprise fund management level. Management of inventory, accounts receivable, and accounts payable directly affects working capital requirements. Accelerating the turnover of inventory and accounts receivable will reduce the demand for funds; the extension of customer payment periods and the shortening of corporate payment periods will also make Increased funding requirements. For capital-intensive enterprises, non-operating expenses such as the retirement of fixed assets and the net loss on sale also have a greater impact on the demand for liquid funds.