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:
• A positive difference 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 working capital implies that the company requires further debts to meet its current liabilities.
• 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
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