If you own a company, the net working capital is a variable that you need to check since it determines the value of your establishment. Every business person will have concerns about what their company rakes in as annual profit, and there comes the relevance of net working capital. It is defined as the difference between the current assets of a company and its current liabilities. Sufficient funds to meet all the financial obligations of the company is indicated by the positive value of net working capital. If you have about $70,000 current assets and $40,000 as liability, your company’s NWC will stand at $30,000.
Calculation of Net Working Capital
Calculation of the net working capital of a company is quite simple when the right formula is used. The formula for NWC is:
Net Working Capital = (Cash and Equivalents of Money) + (Inventory) + (Marketable Investments) + (Receivable Trade Accounts) – (Payable Trade Accounts)
It could also be calculated using the basic definition:
Net Working Capital = (Current Assets of the Company) – (Current Liabilities of the Company)
Let us break down the equation to find what each component means within a company.
Current Assets of a Company
These are the assets that last for a short term on your balance sheet, which can be converted to your local currency within a year or less. Every important asset of a company, including cash equivalents like treasury bills, cash, commercial paper, money market funds, and short-term government bonds are parts of the current assets of a company. You would only need to sum up the values of all these assets to find the total current assets. It could also include accounts receivables, inventories, and marketable investments.
These are the short-term liabilities a company has, which are due in a year or less. The financial obligations will include accounts payable, short-term loans, other major debts, lines of credit, business loans, and real estate loans. By summing up the values of all these variables, you can find the total current liabilities of your company.
With the values of current assets and current liabilities of your company, finding the NWC is not a difficult task. Subtract the current liabilities from the current assets to find the net working capital.
Increasing Your Net Working Capital
Sell all the long-term assets that are of no use anymore to increase you net working capital. Any machinery or equipment that is not considered as current assets can be sold for cash and add it to the existing assets.
You must review your inventory and find ways to increase it. Make sure that you are not overstocked with this asset which not as liquid as cash. Sell it for a premium when the time is right.
One crucial step is to refinance your short-term debts with debts that last for an extended period. By doing so, the short-term debt will not be included in the current liabilities since it wouldn’t be due in less than a year, consequently, increasing your NWC.