The operational capital of a company is referred to as its working capital. Such a capital enables the organisation to run its operations smoothly, forming the life-blood of the business.
Net working capital (NWC) is the difference between the debts owed to a company, and the debts owed by it during the course of its operation. The debts owed to a company or the current assets include debtors, inventory, cash and prepaid expenses, and the debts owed by a company or current liabilities include creditors and outstanding expenses. Now that we know what does the net working capital means, let’s understand what this difference indicates:
• A positive net working capital signifies that the company’s financial obligations are met and that it can invest in other operational requirements
• A net working capital that is nil means that a company has just the amount of funds to clear its current financial obligations.
• A negative net working capital implies that the company requires further debts to meet its current liabilities.
A difference between the two thus presents the company’s liquidity, stating whether it holds sufficient assets to meet short-term liabilities.
An alternate Net Working Capital Formula to calculate NWC is:
NWC = Accounts Receivable + Inventory – Accounts Payable
Where account receivables and inventory are the current assets of a company and account payables are the current liabilities.
Let's understand how to calculate net working capital with an example, when a company has the following Current Assets (CAs) and Current Liabilities (CLs) in its balance sheet.
• Inventories – Rs.40,000
• Accounts receivables – Rs.50,000
• Cash – Rs.10,000
• Debtors – Rs.5,000
• Creditors – Rs.10,000
• Short-term loans – Rs.30,000
• Income Tax – Rs.5,000
= (Inventories + accounts receivables + Debtors – cash) – (Short-term loans + Income Tax – Creditors)
= (40,000 + 50,000 + 5,000 – 10,000) – (30,000 + 5,000 – 10,000)
= 95,000 – 25,000
MSME stands for Micro, Small and Medium Enterprise. It was introduced by the Government of India in agreement with the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. As per this act, MSMEs are the enterprises involved in the production, processing or preservation of goods and commodities. Vital for economic growth, this sector contributes around one-third of the country’s GDP and generates employment for around 110 million of the population.
It also plays an important role in the socio-economic development of the country as many of these enterprises operate in rural India. According to the Government's annual report of 2018-2019, more than 6 lakh MSMEs operate in the country.
Initially, MSMEs were classified based on two factors - investment in plant/machinery and an annual turnover of the enterprises. However, the Ministry of Micro, Small and Medium Enterprises has recently revised the classification by combining these two factors into a single criterion.
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