What Is Net Working Capital?

Net working capital refers to a liquidity calculation which measures the ability of a company to pay off current liabilities using current assets. There is a formula to work out the net value of working capital, which is vital to management, general creditors, and vendors because it reflects the short-term liquidity of the firm and the ability of its management to use its current assets in an efficient way.

If a company cannot meet its current liabilities with the currently available assets, then it will have to use its long-term assets to pay off the liabilities thereof. This can result in decreased sales and even slowed operations, and may also be a precursor to more drastic organizational and financial issues.

Of course, a positive net working capital is far better than one that is negative. A positive net WC shows investors and creditors that that particular business is able to make enough amounts from business operations to pay for the current liabilities using assets. A big positive figure for net WC could mean the company has capital on hand to expand quickly without having to take on new, extra debt. In other words, the business can fund expansion through current growing operations.

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