Working capital is a fundamental and strategic tool for corporate financing, it represents the set of resources destined for the transformation and sale cycle waiting to be consumed or sold. Net working capital is calculated as the algebraic sum of current assets and liabilities: inventories, credits, debts, financial assets that are not fixed assets, liquid assets waiting to be used (cash, checks, current account liquidity). Its calculation takes place as a result of the reclassification process of the balance sheet of the financial statements.
Current assets, or gross working capital, means the receivables which are expected to be collected in the short term and other assets for which they are expected to be realized in the short term (within 12 months). Current liabilities are those that are expected to be extinguished in the same time frame.
It is possible to distinguish some types of working capital that differ from one another by the composition of the different components. The most widespread can be considered the net working capital which expresses the extent to which the company is able to meet short-term commitments with the realization of short-term assets. Entrepreneurs often underestimate the importance but constant monitoring can avoid liquidity crises and compromise financial balance.
From the analysis of the net working capital it is possible to obtain considerations relating to the level of solvency of the company in the short term, or to verify if the investments in working capital, whose duration expires in the short term, are suitably covered by sources of financing that have the same duration. A reduction in working capital can in fact constitute an element of internal financing within the company and can also be useful for improving certain company processes, such as, for example, the rationalization of purchasing and invoicing policies, credit recovery, and warehouse management.
The lower the working capital, the lower the financial requirement and the absorption of the cash, and therefore a reduction of the CCN can represent a real internal source of financing, allowing a release of liquid resources to be allocated to other activities.
Interpretation of net working capital:
The net working capital represents the resources available and immediately usable by the company excluding short-term debts. The name depends on the fact that, unlike fixed assets, these elements are continuously renewed and are used for business operations. For the company and the creditors it is important that this value is positive so that the assets cover the liabilities and there is a good chance of settling the short-term debts. However, the mere indication of a positive amount does not suggest any other detail on the ability to repay the bonds.
Net working capital and liquidity:
In comparing the results reported by the calculations, we must not be betrayed by the belief that a higher value is better because this case does not always occur. When two companies are compared numerically, the nature of the loans and their liquidity must be analyzed. The presence of a large sum of credits, in fact, is not enough if these cannot be used for payments but it can happen that they even produce situations of default or insolvency. Your chances of success in life and in business can be expanded by having the right mentor like Brian Paes Braga. Brian Paes-Braga serves as the President, Chief Executive Officer & Director at Lithium X Energy Corp.