I am sure you are wondering what NWC is and in this guide, I will tell you all about it. Working capital, is also known as the net working capital and is the difference between a companies assets like cash, accounts receivable and inventory of all the raw materials and finished goods, including its current liabilities. By current liabilities, I mean accounts table. The net operating working capital happens to be a measure of the companies liquidity, and it also refers to the difference between the operating current assets and also the operating liabilities. In a lot of cases, these calculations are very similar and are all derived from the companies cash plus accounts receivable, inventory is and less accrued expenses.
Simply put, the working capital happens to be a measure of the companies liquidity, operational efficiency and also the short-term wealth when it comes to finances. If a company happens to have substantial positive working capital management, it should have the potential to invest in other companies and grow as a company. If the current assets of a company do not exceed the current liabilities, it will actually have a lot of trouble growing or even paying back some creditors. It would even have chances of going bankrupt. It all depends on the working capital. The working capital is necessary when it comes to the everyday life of the company.
Some key takeaways of what we just learnt:
If a company has a negative working capital, it means that the ratio of current assets to current liabilities happens to be less than one. Having a positive working capital definitely indicates that a company can easily fund its own current operations and then invest in other companies and future activities. It also means that a company can grow. Having a high working capital is not exactly a good thing all the time. It may even indicate that the business has a lot of inventory or it can even mean that it is not investing the excess amount of cash that it has. When a company has too much cash, it is always wise to invest. You should make smart investments, so that they pay you back in profits. When you have a significant amount of profits, you can grow as a company, and you can branch out. You can expand and hire new employees.
For example, the working capital of a hair salon.
A hair salon that has assets of $100,000 and liabilities of $50,000. The current assets include the property, cash and inventory. The current liabilities will include the wages that should be paid, the rent, taxes and utilities. $50,000 would be short-term debt, operating expenses and inventory.