A Complete Guide to Calculate Net Working Capital
If you are a business owner or have an idea about it, then you may be aware of the concept – what is net working capital. If you know how to calculate net working capital, then you may be able to have better control over it.
If you wish to know about what is net working capital and how to calculate it, then here is a post that you need to go through!
What is net working capital?
In any organisation, capital that is needed for the enterprise’s operation is referred to as the net-working capital. Such capital lets the company run its operations smoothly – helping you manage the lifeblood of the firm.
The net-working capital is the difference between the debts owed by an organisation and debts owed to it during its course of operations.
A company’s debts are mostly debtors, cash and prepaid expenses, inventory and current liabilities like creditors and outstanding expenses. Any business owner not having the net working capital may avail of the net working capital loan and manage all.
How to calculate net working capital?
If you want to calculate net working capital, then you can use the net working capital formula and do that easily. Let’s know more:
The net working capital of the business can be calculated as the difference between short-term assets and liabilities and short-term debts.
The Net Working Capital = Current assets (Less cash) – Current liabilities (Less debt).
In this case, the current asset is a sum of all short-term assets that are convertible into receivable cash like accounts. Also, debts owed by the company and available cash are undertaken as the current asset.
Current liabilities are a total of short-term obligations that are to be repaid within the operating cycle or a year of a company.
The difference between these two aspects showcases the liquidity of the company. It states if it holds enough assets to cater to short term liabilities.
To understand with this example, a company has the following current liabilities and current assets in its balance sheet:
- Accounts receivables – Rs.40,000.
- Inventories – Rs.35,000.
- Cash – Rs.8,000.
- Debtors – Rs.4,000.
- Creditors – Rs.9,000.
- Short term loans – Rs.28,000.
- Income tax – Rs.4,000.
In this case, the net working capital will be calculated as the following:
Net Working Capital = Current Assets – Current Liabilities.
(Inventories (35K) + Accounts receivable (40K) + Debtors (4K) – Cash – 10K) minus (Short term loans (28K) + Income tax (4K) – Creditors (9K).
It means Rs.69,000 – Rs.23,000 = Rs.46,000.
In this case, the company here is said to have a net working capital of Rs.46,000.
It is an amount that is deemed sufficient to cater to its short-term liabilities.
If your business is facing the issue of deficits, you can ensure to avail of finance from other sources. To do that, you don’t need to use your own funds or savings.
You can make the most of the high value net working loan from reputed lenders online.
This way, you can access an amount of up to Rs.45 lakh to undertake different financial needs.
If you wish to apply for the net working capital loan, you can do that online on a lender’s website and save your time and efforts during the pandemic.
Bajaj Finserv comes with pre-approved deals on business loans, home loans, personal loans and more. It can simplify the loan processing and make it faster. You can share your basic details like your name and mobile number to know your pre-approved loan offers right away.
