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Net working capital
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Why it is important?
Net Working Capital is actually a financial method through which the efficiency and short-term financial health of an organizationis measured. It is also the cumulative amount of all the current liabilities and current assets.
Uses of Net Working Capital
- Net Working Capital is actually used to calculate the short-term liquidity of the company
- It is also used to get a general impression of the ability of company management in order toutilize assets in effective and efficient manner.
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How it canbe calculated?
Net Working Capital is associated with the given organisation’s different data and figures, so in order to calculate this learner have to follow a formula and it is:
Net Working Capital = Current Liabilities – Current Assets
Or it can also be calculated through
Marketable investments + Cash and cash equivalents +Inventory +Trade Accounts Receivable –Trade accounts payable= Net Working Capital
If the result of net working capital is positive, then it shows that the amounts of short-term funds available from current assets are excess than the sufficientto pay for current liabilities. But if the value is negative then it shows that the company doesn’t have theadequate amount or capital to pay for their current liabilities. This may also cause the threat of bankruptcy.
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