What is the meaning of net working capital?
Net working capital (NWC) is the difference between a business’ short-term assets and its short-term debts and liabilities. It is ideal to have a positive net working capital, as this signifies that the company’s financial obligations are met, and it can invest in other operational requirements.
Net working capital = current assets (less cash) – current liabilities (less debt)
Here, current assets (CA) = The sum of all short-term assets that are easily convertible into cash like accounts receivable, debts owed to the company, etc. It also includes available cash.
Current liabilities (CL) = The sum of short-term liabilities that need to be paid off within the company’s operating cycle or a year.
A difference between the two thus presents the company’s liquidity, stating whether it holds sufficient assets to meet short-term liabilities.
For example, a company has the following CAs and 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
In this case, NWC will be calculated as follows:
NWC = CA – CL
= (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)
= 85,000 – 25,000
= Rs. 60,000
The company thus has a net working capital of Rs. 60,000, an amount that it can use for its short-term obligations.
In case of working capital deficits, you can avail additional funds to meet your liquidity requirement. Bajaj Finserv eases this concern with its high-value working capital loan, which is available against minimum eligibility.
Additional Read: Importance of capital budgeting
