Interpretation of Business Net Working Capital
Interpretation of Business Net Working Capital
Extremely large companies with public support and major brand recognition at times operate with negative working capital since they can raise funds when the need comes about.
Positive working capital could just be interpreted in a variety of ways depending upon the actual figure, upon the particular business itself, and the industry it is a part of. Different kinds of businesses need different levels of networking capital in order to run smoothly. For instance, retail businesses need higher amounts of working capital in order to cover increased costs in peak seasons. Conversely, online service businesses usually need lower amounts of WC because they do not offer any physical product to customers, and have stable finances to meet operating costs regardless of fluctuations in sales.
When a company has stable finances and a proven business model, it might decide to invest in fixed assets, which are known to generate higher returns over time, rather than keeping capital in short-term securities that are very liquid and have lower yields. This investment strategy could just reduce the business’s current assets, and consequently, NWC, but a very stable company with minimal costs might just decide the investment income that is increased warrants reduction.
