Managing a company's finances is a much more comprehensive process than many realize. Unlike a family budget, there's no guarantee that the business will receive a fixed or minimum amount each month, so it's necessary to always think ahead to maximize its results. An important concept to understand is Working Capital Requirement, or WCR.
It's important that you understand this term and its importance to your company, as it's one of the key indicators for ensuring the financial stability of any business in the medium and long term.
To help you better understand the topic, we'll explain what NCG is, its importance, and how to calculate it. Stay tuned.
Generally speaking, working capital is the amount of money a company has available to maintain its activities, including purchasing materials and paying salaries. NCG, in turn, is an indicator that reflects how much cash the company needs to have on hand at all times to ensure its activities won't be interrupted due to a lack of resources. If your working capital falls below this amount, your processes may be compromised.
Understanding the NCG is essential for any company, as it establishes a foundation for the business to work from. This helps to planning financial, as well as identifying when your company may face a more difficult period. It's better to make cuts early than to have to deal with debt later.
Calculating NCG is relatively simple. It can be done using two formulas:
This formula expresses the NCG in days, that is, the time it takes to renew your budget and the deadline to send payments.
NCG = Average payment term – Average collection term
With this calculation, you can better understand how long the company will hold your money until it has to fulfill its obligations.
The second formula uses the company's asset values and compares them with its passive obligations, expressing the NCG in reais.
NCG = Current assets – Current liabilities
Unlike the first, this formula gives a more accurate value for the amount of working capital you need monthly.
In both calculations, you can obtain a positive or negative value. As you might expect, a positive result means the company already has sufficient working capital and is ready to expand its operations. A negative result indicates a loss. By identifying these variations, you'll find it easier to adapt to your business's demands.
Now that you understand a little more about Working Capital Requirement, you can use this indicator to improve your management. Remember that proper working capital management is one of the fundamental factors in maintaining the financial health of your business.
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