Net working capital is the most important indicator of an enterprise's performance, necessary to determine its financial stability. The optimal amount of net working capital depends on the needs of each enterprise and the scale of activities, as well as on the period of turnover of accounts receivable, stocks, conditions for obtaining loans and borrowings.
Instructions
Step 1
In general terms, net working capital, or net working capital, you can define as the difference between the current assets of the enterprise and short-term liabilities (short-term borrowed capital).
Step 2
It should be remembered that the excess of net working capital over the optimal need is evidence of inefficient use of resources at the enterprise. The lack of net working capital indicates the inability of the enterprise to timely settle its short-term obligations, which can lead to bankruptcy.
Step 3
From the point of view of traditional terminology, net working capital is nothing more than the amount of own working capital, which is calculated as the difference between current assets and current liabilities of the enterprise.
Step 4
Please note that the capital turnover ratio is closely related to the concept of net working capital. It is calculated as the ratio of net sales to net working capital. This ratio shows how efficiently the company uses investments in working capital and how it affects the value of its sales. The higher the value of the capital turnover ratio, the more efficiently the company uses it.
Step 5
You should be aware that in international practice, the term "working capital" is used instead of net working capital. It is calculated as the difference between current assets and operating (short-term and long-term) liabilities. At the same time, operating liabilities are understood as enterprises that have arisen in connection with its production activities.
Step 6
Short-term liabilities include those whose maturity does not exceed 1 year: dividends, accounts payable, taxes, short-term loans, etc. Long-term liabilities should be understood as those with a maturity of more than 1 year: long-term leases, loans, bills that do not need to be paid this year, etc.
