How to Bring about a Change in Business Net Working Capital

How to Bring about a Change in Business Net Working Capital

One very telling sign of the short-term liquidity of a company is a decreasing or increasing trend in its net working capital (NWC). A business with a negative NWC and one that has continual year-over-year improvement could be perceived as relatively more stable than another company with a positive NWC and a downward year-over-year (YOY) trend.

Change in NWC

How can a business bring about a considerable change in net working capital? This is one of the frequently asked questions about finance on the internet. Thankfully, there are three different ways to improve the liquidity of a company year-over-year.

First of all, a company can minimize its own accounts receivable (AR) collection time. Secondly, it can decrease the cost of carrying or holding inventory by sending obsolete or unmarketable goods back to suppliers. Thirdly, it can negotiate with suppliers and vendors for longer AP payment terms. For the uninitiated, the abbreviation “AP” stands for accounts payable, which is the amount a company owes to its creditors. All of these steps would surely help improve a company’s short-term liquidity and show a positive impact during net working capital analysis.

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