Common problems related to working capital

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You can also calculate the immediate liquidity ratio, which only considers the cash available in the treasury divided by current liabilities. Don't be alarmed if the value is small, since having a result between 0.2 and 0.3 is an indication of good liquidity.

Finally, the overall liquidity ratio considers cash plus accounts receivable, all divided by liabilities. The result should be greater than 1, so that you do not rely so much on the sale of inventory to cover debts. Remember that the stock of products represents a current asset, but this depends on the speed with which the products can be sold.

Generally, when a company has a negative working capital, it is due to poor financial management, where potential short-term expenses are not contemplated or anticipated. It may also be the case that expenses are not controlled and the company ends up with insufficient funds for unforeseen events.

Excess inventory can also result in a lack of liquidity, as this does not allow you to meet an immediate obligation and you depend on the sale of the products. This results in a lack of liquidity and a loss of confidence from your suppliers and potential investors.

On the other hand, the accelerated growth of your activities without adequate financing can result in your working capital not being adequate. In this sense, having a good financial strategy or plan is vital.

Another practice you can implement is to improve negotiations with list of south korea cell phone number your suppliers to extend payment terms or receive discounts. You can also take the time to analyze possible future expenses, so that you are prepared for unforeseen events.

Case study
Suppose we have a company with the following current assets and liabilities:

Assets

Treasury: €10,000
Accounts receivable: €20,000
Inventory: €18,000
There are a total of €48,000 in assets.

Liabilities

Accounts payable: €25,000
Short-term loans: €10,000
There are a total of €35,000 in liabilities.

The working capital of this company will be €48,000 - €35,000 = €13,000. The FM ratio will be 1.37.