As we work ourselves out of our economic problems, Jamaicans who know how to “tek dem hand and mek fashion” will start new business ventures. Enterprising gardeners will provide services for lawn care on a more structured basis; electronic gurus will ply their trade on a greater structured basis by providing follow up service to the sale of equipment; freelancers from various disciplines will increase their trade and other professional persons will put up their shingle.
This is not to say that these enterprises are not now functioning but the economic climate provides the opportunity for increase activities in the areas of individually controlled businesses. The development of individual enterprises and the competition that go with this explosion will undoubtedly lead to the formalizing of organization structures that in turn will make for growth in the micro, small and medium sized businesses (MSMBs).
Along with this explosion, the need for rudimentary financial information is necessary and to this end we have prepared the basic information below:
Current Assets – Balances in the main statement of an entity which represent liquid cash and balance in savings and current account at the date of the statement, accounts receivables which are amounts owing by customers, marketable securities which are instruments like treasury bill and commercial paper, inventory which are the items available for sale, prepaid expenses which are amounts paid in advance such as insurance and deposits on rent and electricity and all other assets that could be converted to cash easily. These items are called current if they are expected to change in value over the next twelve months.
Current liabilities – A company’s debts or obligations that are due in near future usually within one year, and includes short term debts that must be paid within a year, accounts payable which is what you owe your suppliers of goods and service, accrued liabilities such as telephone bills, electricity, rent and accounting fees that you did not pay by the end of the period but must be paid promptly and other short-term debts.
Working Capital – This is the value that the business has to work with to generate its sales and pay its bills in the short run. The working capital measures both company’s efficiency and its short term financial health. The value of the working capital calculated as Current Assets – Current Liabilities.
If the current asset is greater than the current liability your working capital is positive and this is good for your business.
From the value point of view, Working Capital can be segregated into Gross Working Capital and Net Working Capital.
- Gross Working Capital refers to the firm’s investment in current assets
- Net Working Capital refers to the difference between current assets and current liabilities
A positive working capital means that the company is able to pay off its short term liabilities, whereas a negative working capital suggests that the company currently is unable to meet its short term liabilities.
From the point of view of time, Working Capital it is referred as permanent or temporary.
- Permanent – Permanent working capital refers to the minimum level of investment in the current assets by the business at all times to carry out minimum level of activities.
- Temporary – Temporary working capital also known as variable working capital refers to that part of total working capital, which is required by a business over and above permanent working capital.
Effective Working Capital Management
The individual owner of a business is accountable to determine and ensure the requirements of working capital in such a way that the amount of working capital available is neither too large nor too small for its requirement. Large amount of working capital would mean that the business has ideal funds. On the other hand if there is inadequate working capital, then the business might run into risk of insolvency, and continued scarceness of adequate working capital can seriously challenge the financial viability and sustainability of the business.
Optimum Working Capital
There is no standard rule for an Optimum Working Capital. The working capital requirements vary from industry to industry. Traditionally, Current Ratio (Current Assets: Current Liabilities) of 1.5 to 3 is considered to be comfortable liquidity position. However, it should be remembered that optimum working capital can be determine only with the reference to a particular circumstances.
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