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📝 What is Working Capital Analysis?
📝 What is Working Capital Analysis?
Imagine you run a small bakery 🍰. Every day, you need flour, sugar, butter — and cash to pay for them! 💰
But you also wait for customers to pay you when they buy cakes. Sometimes they pay late! 😬
So the question is:
👉 Do you have enough money and stuff to run the bakery smoothly every day?
This daily check is called Working Capital Analysis! 🔍
🔍 What is Working Capital?
Working Capital = Current Assets – Current Liabilities
✔️ Current Assets = Things that can be turned into cash soon (within 1 year). Like:
👉 Cash 💵
👉 Stock of flour, sugar, butter 🥐
👉 Payments you will get from customers soon (Debtors) 📜
✔️ Current Liabilities = Money you have to pay soon. Like:
👉 Bills to suppliers 💳
👉 Short-term loans 🏦
👉 Staff salaries 👨🍳
🎯 Why is Working Capital Important?
✔️ Helps you know if your business can survive the day-to-day game. 🎲
✔️ Too little working capital = Trouble paying bills = Big risk 🚨
✔️ Too much working capital = Maybe wasting money on too much stock = Less profit 💸
💡 Easy Example to Understand:
Imagine you run an online store 🛍️
✔️ Current Assets = ₹1,00,000 (cash, stock, customer payments)
✔️ Current Liabilities = ₹60,000 (bills, short-term loans)
👉 Working Capital = ₹1,00,000 – ₹60,000 = ₹40,000
🎉 You have ₹40,000 extra to run your daily operations safely!
But...
If liabilities were ₹90,000... then:
👉 Working Capital = ₹1,00,000 – ₹90,000 = ₹10,000 😨 (Very tight!)
🤔 What is Working Capital Analysis?
It means checking:
✔️ Is your working capital positive (good!) or negative (dangerous!)? ❌
✔️ Are you collecting money from customers fast enough? ⏳
✔️ Are you paying suppliers on time without cash trouble? 💳
✔️ Are you keeping the right amount of stock? Not too much, not too little? 📦
🚦 Signs of Healthy Working Capital:
✅ Cash always available for daily needs 💰
✅ No delays in paying suppliers 🤝
✅ Customers paying you on time 🕰️
✅ Stock levels not too high (to avoid waste) 🎯
⚠️ Warning Signs of Bad Working Capital:
❌ Always short of cash 💸
❌ Delaying payments to suppliers 😬
❌ Customers not paying you on time 😡
❌ Too much unsold stock lying in storage 🏚️
🎯 How to Improve Working Capital?
✔️ Collect money from customers faster 🏃♂️
✔️ Delay supplier payments smartly (but not too late!) ⏳
✔️ Reduce unwanted stock 🗑️
✔️ Control daily expenses 🧾
🏆 Why Should Investors Care?
✅ A company with strong working capital = Runs smoothly = Less risk 🚀
✅ A company with poor working capital = Always cash problems = Danger zone ⚠️
Even profitable companies can fail if they run out of cash for daily work! 😟
✨ Final Thought:
Working Capital is like fuel in a car 🚗 — without it, the business may stop suddenly!
Smart investors always check working capital health before investing — to make sure the company can drive smoothly towards profits! 💰🎯