What is net working capital? Meaning, what role does the business play? Don’t know where to start? Find out more in the following article!
What is net working capital?
Net working capital is the difference between regular capital (current capital) and the value of fixed assets (fixed assets) and long-term investment assets (current assets).
Viewing: What is Net Working Capital
Regular capital is the owner’s capital or other long-term debt that the enterprise (enterprise) can use in the long term (over 1 year). Fixed assets are assets of great value participating in operations. production and business activities and bring profits to enterprises. For example, machinery, equipment, factories, etc. Long-term investment assets are assets that do not participate in production and business activities of the company but still bring profits. For example, bonds (maturity over 1 year), real estate, etc.
How to calculate net working capital
?Based on the definition, we can get the following formula:
Working capital = NVTX – (fixed assets + teaching assets)
In addition to the above formula, the VA can also be calculated as the difference between current assets (working assets) and long-term investments (DEMs) and short-term liabilities (NHH). The formula is as follows:
VLDR = Labor assets & teaching assets – SMALL
Meaning and role of net working capital
Usually there are 3 cases that happen with VLDR:
In this case, the regular capital of the enterprise is not enough to pay for fixed assets and long-term assets. Therefore, businesses are also under pressure to rotate short-term loans and find alternative sources of capital.
VLDR > 0
Regular capital is not only enough to pay for fixed assets and long-term assets, but also has excess capital to invest and finance other assets.
This is the state in which enterprises demonstrate their ability to balance financial stability and development. It’s the state every company wants to be in.
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VLDR = 0
Regular capital is fully capable of financing fixed and long-term assets. In general, this seems to be quite safe, but this is a less stable and stable state.
Enterprises need to increase capital to improve stability and safety.
So what is the net working capital requirement of the business
?Net working capital requirement is an indicator that reflects the need for short-term assets of a business.
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This index is influenced by revenue, goods flow rate, debt collection speed, and time to pay short-term debts (except loans).
Thus, it can be calculated according to the following formula:
Demand for working capital = Inventory + receivables – short-term debt (except debt)
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