To determine a company’s financial strength and stability, working capital is considered as one of the key KPI. It is calculated using the difference between short-term assets and short-term liabilities. Short-term assets are defined as company’s ability to cash their stocks, produced goods, and movable assets within a year. Short-term liabilities are companies’ ability to pay back their short-term loans, within a span of the year.
The company's current assets should always be higher than the current liabilities. In the other way around it could upset the lenders and the investors of the company.
The competence of organization's working capital varies on the payment cycle of the company, suppliers, and the industry which it operates. Some of the other factors to be considered while calculating on the working capital are:
Nature of current asset to be converted into cash with a short span of time:
Most of the manufacturing companies have their current assets as their produced goods. The companies ability to sell the manufactured goods determine its ability to convert current assets to cash.
Company's sales and invoicing cycle:
Companies have their billing cycle for 30 days and 45 days, and 60 days respectively depending upon the nature of the product. It directly has an impact on the company's ability to convert assets into cash.
Similarly, some companies pay their invoices within the first 30 days and some companies take 45-60 days to pay their invoices. This has a direct impact on the liabilities of a company.
Book Keeping Practices:
Traditional bookkeeping practices are sometimes painful in auditing how the assets are calculated and liabilities are calculated. Sometimes projections, special purpose entities, which are ready for acquisition are not considered as assets which impact the calculation of asset
In the competitive business environment existing in offshore trading, suppliers and service providers tend to provide more milestones and invoicing cycle varying from 45-90 days, which in turn really affects the supplier or service provider. Offshore payment cycle which takes more than 7-8 days, in addition to the lengthy payment cycle. Reducing the time to enable quick offshore transfers provides a competitive advantage for the manufacturer to gather his working capital to run the current operations of the company.
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