Is Net Working Capital An Asset, Expense, Or A Liability
What Is Net Working Capital
Net working capital in a business shows the available economic resources that a business can use to manage its day-to-day business operations and short-term obligations.
Net working capital shows the operation efficiency and liquidity of a company. The net working capital can be calculated using the following formula:
Net Working Capital= Current Liabilities less Current Assets
Current assets such as inventories, cash or cash equivalents, marketable securities, accounts receivables, and other short-term assets.
Current liabilities such as accounts payable, bank overdrafts, short-term loans, accrued interest, unearned revenue, and other short-term obligations.
Is Net Working Capital An Asset
Net working capital is not an asset, it is the difference between current assets and current liabilities. This is an essential component of a business that helps a business to know the financial health of the company by providing valuable insights.
Why Net Working Capital Is Important
Net working capital is essential for a business to know the stability and liquidity of a company. It plays a vital role in paying short-term obligations. The following are the reasons why net working capital is important.
- It helps a business to operate efficiently by providing available funds for day-to-day functions
- It helps a business to manage its current assets and liabilities effectively
- A positive net working capital builds trust and creditworthiness in the market
- Business expansions can be possible through a positive net working capital
- It helps a business to fulfill the need of the customer and the demand of the market by managing the inventory level in the stock
- Net working capital helps a business to build a strong relationship with the suppliers by paying them on time
- Net working capital helps a business to manage incidental or unforeseen events
- Net working capital is an indicator of the financial health of the company that can bring more investors to the business, etc.
FAQs
Is net working capital a current asset?
Net working capital is not a current asset itself, it is just an indicator of the company’s financial health.
Is net working capital an expense?
Net working capital is not an expense, it is the difference between current assets and current liabilities of the company.
Is net working capital a liability?
It is an indicator of the company’s liquidity position which shows the difference between current assets and current liabilities.
What is the difference between working capital and net current asset?
Working capital is the broad concept that represents the total working capital available for business functions or operations while the net working capital only focuses on the difference between current assets and current liabilities.