Do you know what net working capital is? Understand what this indicator says about your business and learn how to calculate it!
In order to correctly handle the company’s finances, you need to know and analyze some indicators. And among them, you have to understand what the net working capital is and the information that can be gained through it regarding your business.
Based on the analysis of this resource, several decisions can be made regarding the company, both to increase its results and to avoid possible problems. However, you need to consider some details to correctly calculate this indicator.
Are you curious and want to better understand what net working capital is and how to calculate it? Then continue reading this article and get your questions answered!
What is working capital and what is it for?
Before analyzing your company’s net working capital, it is necessary to be clear about what the concept of working capital means . It can be considered the financial amount that your business needs to maintain to cover expenses for day-to-day operations.
Thus, capital serves to ensure that you do not depend on income to pay the bills. Having healthy working capital therefore ensures that there will always be enough money to maintain the business.
What is net working capital?
As you have seen, working capital corresponds to the amount that the company has to keep operating for a certain period. However, the traditional calculation of this indicator, considering all current assets, is not the only alternative that you can adopt.
It is equally possible to measure net working capital. It will consider the functioning of the business regarding its net assets and net liabilities. That is why such an indicator marks the amount left by the business for immediate settlement or short-run obligations.
How to calculate this indicator?
Apart from knowing what net working capital is, one also needs to know how to calculate it so that it is used properly in the business. For practice, the difference between the current assets and current liabilities needs to be established to determine how much of it the company has.
But what do these terms mean? Check them out below:
Current assets
They are short-term financial claims. They express the money that should come into the company’s cash flow in a span of just one year.
Thus, current assets include cash, accounts receivable, and potential redemption of financial investments — provided that they have a tenure of up to 12 months.
Current liabilities
On the other hand, current liabilities refer to financial obligations over the same period. In general terms, they consist of bills to be paid within 12 months, including taxes and other financial obligations due.
It is worth noting that, in order to have a clear understanding of these aspects, it is essential to have an efficient financial organization in your business. To do so, investing in tools can make all the difference.
What is net working capital for?
After understanding what net working capital is and its relation with current assets and liabilities, one needs to know what this capital is used for. As it can be seen, it is a result of the amount of resources that are available to the company in the short term.
Hence, it is used mainly to express the level of liquidity of the company. The higher the working capital, the more the resources available in the short term or the lesser the expenses for that period.
Furthermore, net working capital helps identify the company’s conditions in relation to the commitments it has made. Based on the calculation of this indicator, it is possible to visualize the financial health of the company in the most recent periods.
How important is it to know net working capital?
So far, you have seen the main characteristics of net working capital. However, you may have questions about the importance of knowing this indicator to ensure the proper functioning of your business.
So, know that net working capital is directly linked to the company’s ability to remain in the market and overcome challenges. Therefore, knowing how to diagnose it helps to keep operations running and contributes to business growth.
Check out three possible results regarding net working capital and the scenario it indicates below!
High net turnover
When net working capital is high, this can be synonymous with good financial health. However, it is important to pay attention to all financial data. After all, there is a possibility of concentrated long-term debt — which, at first, will not appear in this indicator.
Zero net turnover
If net working capital is zero, it is necessary to check financial management . In these contexts, it is likely that the company’s scenario is becoming unhealthy, requiring extra care to make corrections to the budget.
Negative net turnover
Negative net working capital represents a very delicate situation. After all, it means that the company has short-term liabilities that exceed its payment capacity. This reality will lead the company to debt .
This makes it difficult to maintain operations and poses risks to its survival. However, it is important to note that net working capital is one of several relevant indicators for clearly assessing the financial situation of a business.
Therefore, to have intelligent management that allows the business to develop, you must combine it with other financial indicators of the company. This way, it is easier to make a complete assessment of the business’s finances.
Now you know what net working capital is. Use this information to conduct a more accurate financial analysis, focusing on your company’s growth. This way, you will be able to enjoy several benefits!