What Is Included in the Calculation of Net Working Capital?
Net working capital refers to the difference between the current assets and liabilities of a company. It is calculated by deducting its current liabilities from its assets. Following is the general net working capital formula. Net Working Capital (NWC) = Current Assets (CA) – Current Liabilities (CL)
Common current assets included in the calculation are accounts receivable, cash, short-term investments, and stock. The balance sheet’s current liabilities section usually includes accrued taxes, customer deposits, accrued expenses, accounts payable, and more. Some individuals also choose to include the existing portion of their company’s long-term debt in current liabilities. This certainly makes sense because even if the current portion stems from a long-term obligation, it will need to be paid back during the current year. Therefore, it is right to include this in the section with other liabilities which should be met by the company in the next twelve months.
What is the Ideal Working Capital Ratio?
There is no such thing as the perfect ratio; it depends on your particular circumstances. A less than 1:1 ratio usually means a business is finding it tough to pay its bills. A working capital ratio of 2:1 typically gives a reasonable degree of comfort to management and investors.