A short tutorial on how to calculate the financial term of Net Working Capital with simple example.
The Net working capital is the liquidity calculation which measures the ability of a company or firm to pay all its current liabilities based on the current assets. The net working capital is generally the impression of how well the company manage to utilize its assets in an efficient manner. Learn here how to calculate Net Working Capital with the sample example problems.
Net Working Capital Formula:
The net working capital can be calculated by subtracting the total current liabilities from the total current assets.
Net Working Capital = Current Assets - Current Liabilities
Current Assets is the cash or other terms of assets which are expected to converted into cash within one year.
Current Liabilities is the amounts or due to be paid to creditors within a year.
Net Working Capital Example:
Step 1: Aashik owns and operates a retail shop that has the following current assets and liabilities
Accounts Receivable: $3,000
Accounts Payable: $10,500
Accrued Expenses: $5,500
Other Trade Debt: $8,000
Step 2: Substituting the values in the formula,
Net Working Capital = (20,000 + 3,000 + 25,000) - (10,500 + 5,500 + 8,000)
= 48,000 - 24,000
Here the net working capital of a company is Positive as it is capable of paying all its liabilities only with the available assets. Hence the shop is liquid and financially sound in short-term.