In this guide, I will be talking about the net working capital for small businesses. Net working capital happens to be the difference between the current assets of a business and the current liabilities of the very same business. The net working capital is properly calculated with the help of using line items from the balance sheet of a business. Generally, the larger your net working capital balance would be, the more likely it is that your company can cover any of its current obligations. It is very simple; working capital is required for the company to run on a day-to-day basis. The working capital basically explains itself. It is the amount of finances that are required to work every single day.
I will cover some topics that you will want to know about. All of them will focus on the net working capital of a company and why it is essential for small business accounting.
Here is what is included in the net working capital. The net working capital will give you a good indication of the financial health of a business. When it comes to small businesses, the working capital is even more important, because it will be smaller than most businesses. If the working capital is smaller, it will be under a microscope, and every single penny has to be accounted for. If you start losing out on some money here and there, the company will suffer in the long run. The net working capital will show the liquidity of a company, by subtracting the current liabilities from the current assets. It is very simple.
I will list out some line items from the balance sheet, which include the net working capital calculation.
Current assets are all of the assets that will be converted to cash within one single year. It includes currency, accounts receivable, inventory and prepaid expenses.
Current liabilities or like short-term debts which you owe, and these should be paid within one single year. This includes rent, payroll, utilities and payments towards some long-term debts as well.
Here is how you calculate the net working capital. Calculating the NWC will help business understand how well it is able to cover all of the obligations in the short term. Follow these steps to calculate NWC.
You need to subtract your current liabilities from all of your current assets, and the final figure will give you the net working capital of the business. That is how you calculate the net working capital.
The simple formula is: current assets – current liabilities.
Always keep in mind that the net working capital is one of the most essential parts of the company and it’s smooth working.