Financial Statement Analysis Magazine Section

Ratio - Net Working Capital

NET WORKING CAPITAL: or Working capital (Abbreviated WC) is a rough measure of a company's operational efficiency as it involves the operational assets at the short term level in its make-up. It is a measure of a company's liquidity at the short-term level. It is calculated as:

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

Operational efficiencies or inefficiencies of an organization will impact working capital. Example: Reduced sales will impact accounts receivable. Slow collections will impact cash. Reduced cash may impact accounts payable.

Current assets and current liabilities include five accounts which are of special importance and they are inventories, accounts receivable, cash, accounts payable and current portion of the long term debt. The management of working capital involves effective administration of these four accounts.

A negative working capital means that the currents liabilities exceed the current assets which then in turn may imply that the company does not have ample liquidity to meet its obligations in the short-term. This is also termed working capital deficiency.

Positive working capital is required for operational health of a company.

DMC Firewall is developed by Dean Marshall Consultancy Ltd