When we are talking about sales to the public sector, more specifically, working capital is especially important because the government can often be late in paying.
In these cases, working capital is essential to keep your company running even with the delay.
Understand everything about what working capital is, how to achieve it, how to manage it and much more in the following text! Enjoy reading!
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What is working capital and what is it for?
Working capital is the difference between the sum of accounts payable and available cash. In other words, it is the money left in the company's cash register after all operating costs and expenses have been deducted.
In other words, the importance of working capital in the financial management of a company is huge, since it is necessary to keep the business running, both with the correct payment of suppliers and employees and to ensure that a company will be able to make all scheduled deliveries.
Without working capital, a company cannot plan ahead over the months and this can be especially detrimental for companies that want to sell to the public sector .
What are the types of working capital?
What are the types of working capital?
Generally speaking, there are two types of working capital: gross working capital and net working capital, which can be permanent or variable.
Gross working capital is nothing more than the total current assets , while net working capital is the difference between current assets and current liabilities .
Note that current assets and liabilities are not necessarily just cash or debts, but can also represent products in stock or common expenses.
In this sense, they can be classified as permanent or variable. Permanent working capital is the minimum capital needed to keep the company running and meeting its demands.
On the other hand, variable working capital is that which can be added or removed from the company due to a temporary need.
How do I know if I really need working capital?
It's simple: regardless of who your clients are (the state or the private sector), having working capital is essential to keep your company running during those months when movement tends to be lower in your sector.
In the case of companies that want to sell to the government, this tool is even more important, since the State pays for the contracted services or products up to 30 days after delivery, however, this period can be extended for another 90 days.
If a company does not have enough working capital to keep operating for such a period, what happens if the State has to extend the payment?
This is a mentality that entrepreneurs must have with the State, but which must also extend to other clients in the private sector, after all, no one wants to have to take on a very large debt that compromises the functioning of their company.
What is working capital management?
What is working capital management?
Working capital management is an accounting strategy focused on maintaining the financial balance between a company's assets and liabilities.
Through good working capital management, it is possible to cover your financial obligations and increase the company's profits.
Characteristics of good working capital management
Good working capital management takes into account all the factors involved in the company's day-to-day operations.
Things ranging from employee salaries to maintenance costs and other indicators, such as inventory turnover, revenue divided by cost, etc.
What should be a company's ideal working capital?
In general terms, we can say that a company's ideal working capital is that which guarantees its operation with a profit margin.
The specific size of this capital, on the other hand, will vary greatly depending on the company's current situation, its core business, the size of the company, its revenues, expenses, future liabilities, etc.
Working capital: understand the formula to calculate it
There is a simple formula to calculate a company's working capital and it is:
CGL = AC - PC
CGL, or Net Working Capital, is equal to Current Assets minus Current Liabilities.
In other words, to calculate a company's working capital, simply subtract liabilities (bills, debts, payments, loans to be paid, etc.) from total assets (financial investments, cash, accounts receivable, products in stock, etc.).
Therefore, in addition to doing the calculation, you need to pay attention to some important factors.
First, you need to take into account accounts receivable, which are the mobile phone number database result of long-term sales - when the customer takes your product and pays you later.
The longer the payments to be received (both the delivery period and the number of payments made in this way), the more resources the company will need to have to cover the accounts receivable while this money is not reflected in the revenue.
The stock needs to be modified according to the needs of the company's consumer market, which is why it undergoes constant investment changes, both in the type of product and its quantities.
The cash register and current account, on the other hand, are the places where the financial resources that are actually available to the company are concentrated.
It is the cash and current account that the entrepreneur will turn to when it comes to honoring his commitments and debts.
Working capital: necessary care
Working capital: necessary care
A concept that every entrepreneur must keep in mind to take the necessary care with their working capital is the contingency reserve.
A company does not always receive resources on a constant basis. Therefore, you must always be very aware of the amounts to be received and the monthly expenses required to keep the company operating.
It is very common that, in some months, expenses are greater than profits and this is when cash flow and contingency reserves are important.
It's simple: in every month in which the inflow of resources is greater than the expenses, that is, when there is a profit, it is important that this profit, instead of being pocketed, goes to a reserve that will cover these other months with less movement.
The ideal way to have a company with a well-managed operational cash flow and financial security is for this contingency reserve to be able to keep the company afloat without revenue for at least six months.
Taking these precautions is necessary when we are serving the private sector, but it is essential when we are talking about selling to the public sector, since, in total, the State can take up to 120 days to pay for a bid if all deadlines are extended.
If a company does not take these precautions, if it does not have good working capital or a contingency reserve that will help it stay afloat during lean times, it simply will not be able to sustain itself if something unexpected happens.
On the other hand, if a company happens to commit fraud with the necessary documentation and this ends up resulting in only partial delivery of the agreement or non-delivery, as we saw previously, the company may suffer various types of administrative sanctions.
How to obtain and increase your own working capital?
suffer various types of administrative sanctions. How to obtain and increase your own working capital
As we saw in the previous topic, one of the ways to increase working capital is through savings during the good months.
In other words, in months when the company has a higher income than its expenses, the ideal is to place this surplus in a contingency reserve.
It is a way of ensuring that the company will remain operational over the months and even of expanding the company's areas of operation in the future, as demand grows.
However, there are still other methods to increase your company's working capital. Check them out:
Identify and cut expenses
As a company manager, you must pay attention to your company's expenses. The first step is to divide them into one-off and recurring expenses.
This way, you will have a better idea of which expenses can be cut and which ones definitely cannot.
There are several opportunities to do this, from purchasing raw materials, office supplies and equipment, etc.
Control Cash Flow
You must keep your cash flow under control to be able to maintain and increase your working capital through the contingency reserves we mentioned earlier.
However, it is very important especially if you have employees with a formal employment contract, as they are entitled to the thirteenth salary.
If you don't have your cash flow under control and organized, you might end up with no idea where to get the money to pay your employees' thirteenth salary at the end of the year.
However, by controlling cash flow, you can separate the installments correctly throughout the months of the year and pay all your employees on time and in accordance with the Consolidation of Labor Laws (CLT).
Have a business plan
Having a business plan drawn up from the beginning of a venture is essential to understanding how the company works.
It makes the entrepreneur's life easier throughout the entire trajectory of the enterprise, as the document contains the months with the highest and lowest revenue, in addition to other data, such as market analysis, competitor analysis and marketing planning.
The business plan can also help you with financial planning, informing you, for example, after how long you will have enough working capital to start making a real profit on the operation.
Know how to negotiate with suppliers
Negotiating deadlines with suppliers can be quite challenging, however, as a relationship is created and there is a history of good payment, the company will gain more recognition and freedom to negotiate deadlines.
The ideal is to have a relationship of trust with suppliers. Being collaborative and making your expectations clear is extremely necessary for good collaboration.
Consider taking out a loan
Taking out loans is always an option for those who want to keep their company's working capital in order.
You can find several special loan opportunities, as well as partnerships to provide health insurance or food vouchers for your employees through Mapse !
Mapse is a Public Procurement Portal project that offers a series of Partner benefits to associated entrepreneurs of all sizes and segments.
Among other things, we offer insurance, credit for companies, cooperative tourism, digital certificates and the opportunity to provide benefits to your employees.
Become a Mapse partner and start enjoying the benefits right now!
Conclusion
As we have seen throughout the text, working capital is a very important aspect within companies, as it allows them to grow more quickly through the management and application of financial resources acquired in the operation.
Having good working capital means that your company has the capacity to meet large demands and serves as a preventive measure in times when the State needs to extend payment for services contracted through tenders .
Therefore, invest in working capital, make a contingency reserve and try to manage working capital in the best possible way, cutting unnecessary expenses and, when possible, making investments that will further reduce your costs in the future.