Working capital, profitability, leverage, liquidity, capital structure, bonds, and shares; are terms used in financial administration, we present some definitions, in the development of the following work.

Financial planning and control processes are closely related to strategic planning.

Financial planning and control involve the use of standards-based projections and the development of a feedback and adjustment process to increase performance.

The results obtained from the projection of all these cost elements, which we present below and are reflected in the income statements.

working capital

It is the investment of money made by the company or business to carry out its short-term economic and financial management, understood as short-term periods no longer than one year.

The criterion that Working Capital is nothing more than the difference between Current Assets and Current Liabilities is widespread among most specialists and specialized literature.

WC=CA – C L(1)


WC = Working capital

CA = Current assets

CL = Current liabilities

The work that is presented below includes a group of considerations that show that this statement is not true, which is of vital importance for the maximization of the company’s profits.

Observe the following graph

working capital

profit maximization


CA´= Part of the WC removed from the CA

FA = Fixed assets

LTL = Long-Term Liabilities

E = Equity

As can be seen, if what is stated in (1) is assumed to be true, the area shaded in yellow constitutes the Working Capital available to the company to carry out its economic and financial management, obtaining its financing in the LTL, which is characterized by having high-interest rates, that is, a high cost.

gross working capital

Working capital (also called current capital, working capital, working capital, working capital, or working capital), is a measure of the ability of a company to continue with the normal development of its activities in the short term. It is calculated as the excess of short-term assets over short-term liabilities.

net working capital

It is defined as the difference between current assets and short-term liabilities, which the company has. If assets exceed liabilities, the company is said to have positive net working capital. In general, the greater the margin by which current assets can cover the company’s short-term obligations (short-term liabilities), the greater the company’s ability to pay its debts as they come due.

Such a relationship results from the fact that current assets are a source or source of cash inflows, while short-term liabilities are a source of cash outlays. The cash outlays involved in short-term liabilities are relatively predictable. When the company takes on debt, it is often known when it will come due.

Another definition of Net Working Capital

Net Working Capital can also be thought of as the proportion of current assets financed by long-term funds. Understanding as long-term funds the sum of the long-term liabilities and the social capital of a Company.

Because short-term liabilities represent the sources of the Company’s short-term funds, provided that fixed assets exceed short-term liabilities, the amount of such excess must be financed through term funds. even longer.

Business profitability concept

Profitability is a relationship (a rate expressed in %) that compares net profit either with net sales, with total assets or economic profitability, with equity or own capital, or with investment.

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• The return on sales is known internationally as ROS (return on sales).

• The economic return on total assets is called ROA (return on assets).

• The equity or financial return is called ROE (return on equity)

• The return on investment is ROI (return on investment).

Return on investment

The profitability of any investment must be sufficient to maintain the value of the investment and to increase it. Depending on the objective of the investor, the return generated by an investment can be left to maintain or increase the investment, or it can be withdrawn to invest in another field.

To determine profitability, it is necessary to know the amount invested and the time during which the investment has been made or maintained. There are two types of investment: fixed return and variable return.

Fixed profitability is the one that is agreed upon when investing, such as a CDT, bonds, debt securities, etc. This type of investment assures the investor a return, although it is not usually high.

Variable profitability is typical of shares, fixed assets, etc. In this type of investment, profitability depends on the management of them by those in charge of their administration. In the case of shares, depending on the profit of the company, it will also be the amount of profits or dividends to be distributed.

Example determination of profitability

Two financial indicators allow for determining the profitability generated by the assets and the patrimony of a company or person.

To better illustrate the difference and the reason for the two types of profitability, we will work on the same example, assuming that a company has assets of $10,000,000.00, liabilities of $3,000,000.00, and equity of $7,000,000.00. The net profit of this company in any year is $6,000,000.00

  • Return on assets
  • Return on Assets = (Net Income/Assets)*100
  • Return on assets = ($6,000,000.00/ $10,000,000.00)*100
  • Return on assets = 60%.

From this, it can be said that the assets of the company for a year generated a return of 60%.

  • Return on Equity
  • Return on Equity = (Net Income/Equity)*100
  • Return on equity = ($6,000,000.00/ $7,000,000.00)*100
  • Return on equity = 85.7%

This means that the company’s assets during the year obtained a return of 85.7%.

As can be seen, the return on equity is more than 25 percentage points higher than the return on assets. The reason is that the equity is less, and despite being less, the same utility was obtained ($6,000,000.00).

This occurs because the true capital invested is not the assets but the equity, since part of the assets are financed by third parties. The investor, of the $10,000,000.00 of assets, has only financed $7,000,000.00, and that is his effective investment.

Return on sales

It is also known as the productivity index; which measures the relationship between net profits and sales revenue.

The formula to calculate this indicator is as follows:

working capital


It is the relationship between own capital and credit invested in a financial operation. By reducing the initial capital that is necessary to provide, there is an increase in the profitability obtained.
The increase in leverage also increases the risks of the operation, since it causes less flexibility or greater exposure to insolvency or inability to meet payments.

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Financial appeceament

It is the effect introduced by indebtedness on the profitability of own capital. The variation is more than proportional to that produced in the profitability of the investments. The necessary condition for amplifying leverage to occur is that the return on investments is greater than the interest rate on debts.

Financial leverage is the effect that occurs on the profitability of the company as a result of the use of debt in its financing structure.

It is convenient to specify what is meant by profitability, to understand if this effect is positive or negative, and under what circumstances. As is known, profitability is not synonymous with accounting results (profit or loss), but with the results of the investment.

negative leverage

When obtaining funds from loans is unproductive, that is, when the rate of return that is achieved on the company’s assets is less than the interest rate that is paid for the funds obtained in the loans.

Positive financial leverage

When obtaining funds from loans is productive, that is when the rate of return that is achieved on the company’s assets is higher than the interest rate that is paid for the funds obtained in the loans.

favorable leverage

It is said that favorable leverage occurs when the company uses the funds obtained at a fixed cost to obtain more than the fixed financing costs paid.

unfavorable leverage

Unfavorable leverage occurs when the company does not earn as much as the fixed costs of financing.

Leverage Advantages

Disadvantages of leverage

The government receives less income from the payment of taxes paid since these are deductible.


Liquidity represents the quality of assets to be converted into cash immediately without significant loss of value.

In such a way that the easier it is to convert an asset into money, the more liquid it is said to be. In economics, it is defined as the degree of availability with which the different assets can be converted into money (the most liquid means of payment of all those that exist).

A checking account at a bank is much more liquid than real estate. An individual or a company that has all its assets in cash, readily available securities, or negotiable instruments, has a liquidity position.

capital structure

Permanent, long-term financing of the business is represented by long-term debt, preferred capital, and stockholders’ equity (stockholders’ equity consists of capital stock, surplus capital, and retained activities).

The capital structure is different from the financial structure because the latter also includes short-term liabilities and reserve sales.

The capital structure is closely related to the long-term financial situation of the company, even to finance and plan its future operations.

The funds that the company has can be divided into those that are contributed by the partners and those that are obtained from third-party loans, taking into account that the former will always be related to the amount of time in which the resources are in the hands of the company. the entity, on the income and business assets while it remains in operation and participation in decision-making.

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types of capital

Capital contributions:

It consists of all long-term funds provided by the owners to the business. This has three main sources of obtaining resources: preferred shares, common shares, and retained earnings, each with a different cost associated with each of them.

debt capital

This includes any type of long-term funds that are obtained by loans, with or without guarantee, through the sale of obligations, or negotiated. A business can only use a given amount of debt financing because of the fixed payments associated with it.

The origin of capital

To make this topic more precise, the origin of the funds and capital in a company must be distinguished, between its own and that of others or third parties.

The own capital is the one that was deliberately limited for the constitution of a company, and that, in principle, does not have to be reimbursed.

The foreign capital is made up of funds lent by elements outside the company, debts of the latter and against suppliers, etc.

Capital is the financial means of achieving a means of production. Capital is constituted by savings, that is, by the use of a part of the production for later productive purposes, said capital is consumed by the termination of the period of use of the goods that are purchased or by the loss of their economic efficiency.

As for circulating capital, it is consumed in the same way, or considering its monetary aspect or equivalent, it may also be transformed into mobilized capital.

The capital receives a remuneration called interest, and it can be fixed or variable depending on the results of its exploitation or the progress of the company.

From being a simple remuneration of capital, interest also comes to perform two basic functions: encouragement of savings and criteria for the use of capital.

Common actions

Title or value that represents the patrimonial right of an investor in a corporation through the share capital. Each common share grants identical rights to all of its holders.

Preferred stock

Title or equity value that has priority over common shares in connection with the payment of dividends. The dividend rate of these shares is fixed at the time of issuance and may be fixed or variable.


Fixed-income securities, registered or to order, accrue periodic interest and can be issued by entities of the public or private sectors with a term equal to or greater than one year.


Financial planning is a key tool for the success of any business since it allows for determining how much money the company will need, determining how much money the company will generate, and determining external financing requirements.

In these times, in which capital is expensive and economic uncertainty is high, financial planning is essential to reduce risks.

Given all these factors, it is advisable to have full knowledge of all the accounting terms of a company and the facilities that this represents at any given time.