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What is Net Working Capital?

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What is Net Working Capital?

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 which capital is known as working capital, let’s understand what this difference indicates:
1. A positive difference signifies that the company’s financial obligations are met and that it can invest in other operational requirements.
2. A net working capital that is nil means that a company has just the amount of funds to clear its current financial obligations.
3. A negative working capital implies that the company requires further debts to meet its current liabilities.

A good working capital ratio ranges between 1.2 to 2.

However, these parameters aren’t definitive indicators of the overall financial health of a company. At times, sudden financial contingencies might require an increase in short-term debt. Also, a positive figure for net working capital could imply a blockage of cash in assets that aren’t easily convertible.

For your business to operate smoothly, it is important that it has adequate liquidity to fund its short-term operations. That’s why Bajaj Finserv offers working capital loans up to Rs.30 lakh to help focus on your business growth and not worry about the finances.

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