Net working capital is the remaining amount of current assets available to a company after settling it’s current liabilities.
All those assets which are readily and quickly convertible to cash (usually convertible within a year or less) are called current assets or gross working capital. Current assets include:
- Cash equivalents
- Short-term investments
- Accounts receivable
- Stock inventory and
- The portion of prepaid liabilities whill will be settled within a year
All those liabilities which are to be settled within twelve months or less are called current liabilites. Current liabilities may include following:
- Notes Payable
- Accounts Payable
- Income Tax Payable
- Sales Tax Payable
- Accrued Expenses Payable
- Unearned Revenue etc.
Net working capital is total current assets minus total current liabilities. Net working capital shows a company’s efficiency and financial health. Investors and creditors often want to know net working capital of a company in which they are planning to invest. But net working capital is not the only measure to judge the financial health and efficiency of a company, it may show good net working capital but thats may be due to large stock of inventories, large accounts receivable, a poor inventory management etc. Therefore before investing one should make a complete financial analysis including financial ratios.
Net working capital also know as working capital or net current assets. Take a look on the following balance sheet extract of Britney Spears Computers:
Britney Spears Computers has gross working capital or total current assets of $180,000 and total current liabilities of $100,000. Therefore, after deduction it’s total current liabilities from total current assets, net working capital is $80,000.