Working capital (WC). Formula according to IFRS and RAS. Example

Analysis of the financial condition of the enterprise

Newsletter closed

Upon closing, subscribers were transferred to the Levitas: More money from your business newsletter, which we recommend that you subscribe to.
You can find mailings on similar topics in the Mailing Directory.

Author Alexander Levitas

Statistics

1.416 subscribers 0 per week

• Issues
• Statistics

All episodes

Standard values

Working capital must be greater than short-term liabilities. Otherwise, there is a risk of bankruptcy. However, if there is an increase in working capital over time, then this means the accumulation of accounts receivable, which is part of current assets.

Working capital management is based on controlling its value in such a way that, on the one hand, the company has the opportunity to conduct operational activities, and on the other, there are no problems with financial stability. To determine the optimal value, optimization is carried out.

When optimizing working capital, they usually work with processes affecting: Production and Inventory, Sales and Accounts Receivable, Purchases and Accounts Payable.

Optimization of working (working) capital. Photo: biconsult.ru

Results

Working capital is the difference between the value of a firm's current assets and the amount of its short-term liabilities. In another interpretation, this is the difference between equity (supplemented by the amount of long-term liabilities, if any) and the organization’s non-current assets.

You can learn more about the features of calculating a company’s own working capital in the articles:

• “How to calculate your own working capital (formula)?”;
• "Equity on the balance sheet is...".

You can find more complete information on the topic in ConsultantPlus. Free trial access to the system for 2 days.

Calculation example using Colgate-Palmolive according to IFRS

Let's calculate working capital according to the international financial reporting system (IFRS) for Colgate-Palmolive (CL). Let's take the annual reports from the company's website in the section for investors. In the consolidated report, we take the value of Current Assets and Current Liabilities. Also, do not forget that the data in the balance sheet is presented in “millions”, i.e. then add 6 more zeros.

Working Capital (WC) calculation for Colgate

We enter all the data and get the value for Colgate for 2021 of $141,000,000.

Formulas for working capital on the balance sheet

The basic formula for calculating working capital is as follows:

RK = B1200 – B1500,

Where:

RK - working capital;

B**** - lines of the organization's balance sheet.

Economists identify another formula for calculating the working capital indicator:

RK = B1300 + B1530 – B1100.

In this case, working capital is the result of the addition of equity capital and long-term liabilities, reduced by the amount of non-current assets of the organization.

The second formula may be optimal if the company, in principle, has long-term liabilities and non-current assets. An intermediate option is also possible, when there are no long-term liabilities, but there are non-current assets:

RK = B1300 – B1100.

Note! Since 2021, the form of the Balance Sheet and the financial results report has changed. See here for details.

Calculation example using PJSC Magnit according to RAS

Let's look at how this indicator is calculated using Magnit (MGNT) as an example. Let's take public reporting from the company's website. Do not forget that the data is in thousand rubles, then you will still need to add 3 zeros.

Calculation of Working Capital (WC) for PJSC Magnit according to RAS (1)

Calculation of Working Capital (WC) for PJSC Magnit according to RAS (2)

We will need two lines from the Balance Sheet: Current Assets and Current Liabilities. Let's calculate working capital for 3 years. Working capital has remained virtually unchanged over the past two years.

For 2021, Magnit’s working capital was equal to RUB 30,422,373,000.

What is working capital

Working capital is usually understood as the capital of an organization that is used to finance its core activities.
In general, it represents the difference between a firm's current assets and its current liabilities. A synonym for the term in question is “own working capital”. Working capital is sometimes also referred to as “net working capital.”

All 3 names of the indicator in question are equally correct.

Working capital is calculated using the balance sheet. In this case, different formulas can be used for calculation.

See also “Equity on the balance sheet is...”.

ХО - the ratio of working capital (the difference between current assets and short-term liabilities) to total assets (or Kam, see 2.80) [p.69] As is known, in the practice of financial management, to assess solvency, the working capital indicator has been introduced, defined as the difference between current assets and current liabilities.
[p.29] From here it is clear that the working capital indicator should be adjusted, first of all, to the amount of long-term debt, in order to have an idea of ​​​​the ability of the enterprise in question to meet all its debts and obligations at a given time, and not just current. [p.30]

But even in this case we can talk about absolute solvency, i.e. solvency solely in cash is not necessary. Therefore, working capital as a category of solvency is more of an accounting concept than an economic one. [p.30]

Non-current assets (VNA) Current (current) assets (TA) Non-current assets (VNA) Own current assets (CTA) or working capital (RK) Borrowed current assets (ETA) or F [p.65]

The transition from working capital to financial capital and from financial capital to working capital is regulated by the following formula [p.66]

The financial and economic condition of an enterprise can now be assessed not so much against the background of account balances, the amount of working capital and ratio calculations, but rather against the background of the movement of property, income and financial resources of the enterprise. [p.138]

The peculiarity of this analysis is that the management of the financial stability of the enterprise is carried out online, while both the entire enterprise and individual types of activities receive an economic assessment. The values ​​of cash balances, the amount of working capital and equity capital established by calculation in monetary form make it possible to identify those types of activities that are leading and most financially stable, and, consequently, those types of activities that hinder the development of the enterprise. [p.199]

The current liquidity ratio is a fundamental indicator for assessing the financial solvency of an organization, the sufficiency of its current assets, which, if necessary, can be used to pay off its short-term obligations. The value of the current liquidity ratio should be in the range from 1 to 2. The value of the lower limit of the ratio, equal to 1, is due to the fact that there should be as much working capital as there are short-term liabilities. The excess of current assets (twice) over short-term liabilities creates conditions for the sustainable development of production and financial activities, as a result of which working capital, or net current assets, is formed. [p.232]

Working capital represents liquid reserves that cover costs (expenses) arising as a result of unforeseen circumstances and uncertainty in balancing income and cash payment of obligations. Net working capital, as part of the organization's net assets, is also an insurance collateral (reserve) for bank lenders in the event of non-repayment of loans. [p.232]

There are no fundamental differences in the concepts of working capital and net current assets. The calculation of NOA is proposed based on the new financial statements, effective from January 2000. The names of the lines of the second, third and fifth sections of the Balance Sheet are, we hope, known to every accountant-analyst (see Table 8.3). [p.235]

What are the specifics of calculating net current assets (working capital) [p.273]

Current assets (working capital) Constant part Own working capital [p.616]

This means that any attraction of borrowed capital in non-monetary form, as a rule, accounts payable and accruals for all reasons, sharply worsens the financial condition of the enterprise, because the ratio between own and borrowed financial resources immediately changes. Despite the fact that property in general is growing, financial capital as an indicator is sensitive to these changes due to an increase in accounts payable in general and for non-financial assets in particular. On the other hand, if there was an increase in borrowed capital in the context of long-term assets, then another indicator would react - working capital. [p.206]

Stages Assets financial resources financial resources Total Working capital Financial capital [p.207]

A similar situation is observed in the case of working capital, since, other things being equal, working capital goes through the same stages as financial capital. [p.210]

The procedures prescribe the actions that must be taken in each specific situation (for example, prompt calculation of the amount of working capital and the expected cash balance at the date of payment of interest on the loan). [p.330]

Cash as a company's working capital [p.185]

Financial analysts often also report on the sources and uses of working capital. This report is very similar to the report on the sources and uses of funds [p.185]

Analyzing statements of cash and working capital provides us with ample opportunity to gain insight into the firm's financial operations, which are especially valuable to the CFO who is analyzing past performance and the firm's development plans and their impact on liquidity ratios. With this analysis, unbalanced use of funds can be detected and appropriate action can be taken. Analysis of data over the past few years may reveal inventory growth that is disproportionate to the growth of other assets and sales. This indicates ineffective inventory management. Thus, thanks to the report's information on the sources and uses of funds, your attention is focused on problems that you can analyze in detail, after which you can take action to correct your work. When a company has many divisions, divisional reports may also be useful. Such reports will allow management to evaluate the actions of departments in relation to the funds allocated to them. [p.187]

Another use of cash flow statement data is to assess a firm's financial position. An analysis of the main sources of funds over past periods shows to what extent the economic development of the company was financed from external sources. When assessing a company's financial position, you will want to find out what proportion of dividend payments it makes to the company's total cash needs. A report on the sources of funds and their use is also useful in deciding whether the company is growing too quickly and whether financing is constrained. You can determine whether there is an increase in commercial credit that is disproportionate to the increase in current assets and sales volume. If your commercial loan has been growing at a significantly higher rate, you may want to evaluate the impact of increasing delays in commercial loan payments and the ability to fund them in the future. The data from this report will also allow you to analyze the structure of short- and long-term financial investments from the point of view of the company's cash needs. If these needs are driven primarily by the need to invest in fixed assets and continually increase working capital, you should be concerned when financing comes primarily from short-term loans. [p.187]

When thinking about profitability, we assume that current assets account for a small portion of total assets and short-term accounts payable account for a large portion of the total. The result of such a strategy will be a low or even negative level of working capital. Determining the profitability of this strategy constitutes a risk for the firm. In our case, risk is the probability of insolvency. According to existing legislation, insolvency occurs when a company's assets are less than its accounts payable, that is, when there is a negative difference between the value of funds and the amount of debt. On the other hand, insolvency occurs when the company is unable [p.224]

Now that we've taken a closer look at working capital issues, let's look at decisions that have a long-term impact on the company regarding financing and spending. [p.339]

Working capital equal to the difference between current assets and current liabilities (total of section II, line 290 - total of section V, line 690). [p.60]

The choice of the structure of financing sources has a decisive influence on the size of net working capital (NWC), or, as it is also called, working capital. Net working capital is the difference between current assets and current liabilities. Thus, PSC is that part of current assets that is financed from long-term sources, indicating the financial independence of the company from current liabilities. The higher the NER, the lower the risk of insolvency and production disruptions. With a low level of NER, the financial condition of the enterprise is unstable. Production stops occur due to a lack of its own working capital, the company has to take out expensive, above-plan loans, and pay heavy fines. As PSC grows, the financial position and production activities of the enterprise stabilize, which is manifested in increased profits. At a certain optimal volume of NOS, profit reaches a maximum. A further increase in its volume may lead to the fact that the enterprise will have to [p.230]

Funds received from the client's current operations. Increasing liabilities (liabilities) and reducing debt (assets). Accounts receivable at the end and beginning of the reporting period, respectively. The positive difference between D32 and D31 is the use of client funds, the negative difference is the increase in the client’s working capital. Inventories at the end and beginning of the reporting period, respectively. A positive difference between 32 and 31 is a cash flow, a negative difference is an additional source of client funds. [p.155]

Current liquidity throughout all periods exceeds 1. AB has no long-term liabilities, and working capital is positive. This means that the company, during the periods under study, managed its receivables and payables quite effectively, as a result of which the amount of equity in circulation has a constant tendency to increase. [p.40]

It is a measure of a company's ability to meet its short-term obligations. The TK ratio shows how many times current assets exceed short-term debt. A too low TC value indicates the company's inability to meet its short-term obligations immediately. Too high a TC value is favorable for lenders, but indicates excessive investment in working capital that does not produce income. [p.167]

Working (working) capital - calculated as the difference between the amount [p.258]

Net working capital (working [p.26]

W - working capital (as the difference between current assets and current liabilities) / - absolute value of interest on the loan % - average interest rate on the loan EBIT - profit before interest and taxation EBT - profit after interest on the loan [p.173]

Working capital is current assets minus current liabilities (current assets minus short-term accounts payable). [p.185]

In many countries with developed market economies, the contents of the balance sheet are structured according to the degree of liquidity slowdown, i.e., easily salable types of property, considered as the working capital of the company, are shown at the beginning, and the least liquid assets are shown at the end of the balance sheet. [p.70]

The level of the maximum weighted average cost of capital is a criterion indicator for assessing the effectiveness of forming the appropriate type of policy for an enterprise to finance its current assets (working capital) at the post-investment stage. Based on this indicator, predicted for the near future, the enterprise forms an aggressive, moderate (compromise) or conservative type of policy for financing these assets. [p.413]

Expansion. Companies that require additional investments to finance their activities. Investments can be used by them to expand production and sales volumes, conduct additional marketing research, increase fixed assets or working capital. In addition to those listed above, investments by venture funds and [p.32]

Businesses with a high working capital ratio

Such situations exist and may not indicate the inefficiency of the company. Very often you can find a high working capital ratio in seasonal businesses: they should always have a good supply of assets even when the working season is closed and the business is temporarily not operating. Businesses that operate only during certain times of the year often face additional costs and expenses, so good capital is essential to ensure their survival.

For example, you can cite online swimsuit stores, or farms that depend on the time of year, or a company offering landscaping services.