Working Capital
How is it calculated?
Caena
Last Update 3 years ago
Net Working Capital (NWC)
Working capital, also known as net working capital (NWC), is the difference between a company’s current assets, such as cash, accounts receivable, inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.
Working capital assesses a company's ability to pay its current liabilities with its current assets, giving us an indication of the company's short-term financial health, liquidity and operational efficiency. In general, it is the amount of capital that a company has available to use for its day-to-day operations.
The following 4 components are commonly seen in working capital calculations:
Accounts Receivable (AR)
Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers in the short term. Accounts receivables are listed on the balance sheet as a current asset and is any amount of money owed by customers for purchases made on credit.
Accounts Payable (AP)
Accounts payable (AP) is an account within the general ledger that represents a company's obligation to pay off a short-term debt to its creditors or suppliers. It is listed on the balance sheet under the current liabilities section. The management may choose to settle their outstanding bills as close to their due dates as possible to improve cash flows.
Cash and Cash Equivalents (CCE)
Cash and cash equivalents refers to the line item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately.
Cash equivalents include bank accounts and marketable securities, which are debt securities with maturities of less than 90 days. However, oftentimes cash equivalents do not include equity or stock holdings because they can fluctuate in value.
Inventory
Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders.