What is a working capital requirement?
working capital requirement is the minimum amount of resources required by the Company to effectively cover the usual costs and expenses necessary for business operation. Since each company's capital needs will be slightly different, there is no ideal amount of working capital that generally applies to all companies or even companies involved in the same industry. Nevertheless, new companies can develop an idea of what type of requirement will have to work at given levels by exploring the costs and expenditures associated with other corporations involved in similar operations.
The basic formula for determining working capital includes only two factors. First, it is necessary to define the current liquid assets that the company has. This may differ somewhat from general assets, as it focuses on those sources that can be quickly and easily converted to cash. Liquid assets can be such resources as outstanding receivables on ordinary accounts, property thatis not used directly in the operation of business, and balance in various operating accounts.
The current obligations of the company must also be determined. This includes both short -term obligations such as the usual and general monthly operating costs, as well as any long -term debt. By removing liabilities from liquid assets, it is possible to determine the current requirement for working capital.
The general idea is to ensure that sufficient income to cover the company's basic operations is generated and allowed to generate other income in the future. Companies may operate with a negative working capital on the basis of some long -term debt, and this does not necessarily be a sign that the company has financial problems. However, the calculation of the current working capital requirement at least once a quarter will allow companies to find trends that may indicate problems. For exampleAlternatively, even if long -term debt has been reduced, this may mean a problem with reduced sales, lower earnings or other factors.