Net Working Capital

 

What is the Net Working Capital ?

 

This indicator measures in absolute terms the balance of the company's short-term financial structure through a very simple difference of two values found in all company financial statements. For this purpose, it is necessary to reclassify the balance sheet using the temporal financial criterion to obtain the two values of current assets and current liabilities which allow to know the NWC. In general terms, it expresses the balance of the enterprise’s current financial structure.

 

CURRENT ASSETS - CURRENT LIABILITIES

 

The formula for the Net Working Capital is a common standard used by all UN and OECD Countries and stated by the IASB. However domestic Accounting Principles the valuable amounts of these two main quantity could slightly differ due to domestic rules unless ithe company follows officially the International Accounting Principles and US GAAP that by the way states clearely the followings:

 

  1. current assets (all assets expected to be converted into cash  or used up within 12 months timing)
  2. current liabilities (those due on one year or less like accounts payable and amounts owed to creditors, short term nots payable, loans due, instalments due and accrues expenses liabilities). 

 

 

What is the Net Working Capital for ?

 

It is important to stress the relevance of the timing here as time-risk is a foundamental principle of corporate finance. As a fact of the matter, we said that it is referred to as current assets minus current liabilities and it is used to assess the enterprise’s short-term financial sustainability as well as to assess whether the enterprise can cover unexpected expenditure in the next 12 months.

On a Risk Management perspective It is important to evidence that where it is positive or negative, the Net Working Capital gives an overview over the enterprise capacity in order to understand if the company does have or not have sufficient resources to pay debts due in the short term. However, it is not sufficient the measure the company's solvency and its capability to pay in a short term.

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