Calculating Change in Net Working Capital
There are many things that undergo changes and the net working capital is not exempted from this. This is because many factors affect the capital and they have a big say in the capital.
Calculating change in net working capital is a kind of knowledge that a business owner must be erudite of in order to help him achieve his business goals.
Change in the networking capital is basically the change in current assets as well as liabilities. Knowing how to calculate it is something that is expected from a business owner for this is one factor that greatly affects an entity, no matter what the nature of that business is.
Defining Working Capital
Working capital is basically the measure of the short term liquidity of a company or the capacity that it has in covering the liabilities that are also of short term. Working capital is then defined as difference between the current assets and liabilities of the company. Therefore, working capital is
Working Capital = Current Assets - Current Liabilities
Change in Networking Capital
If the working capital is referred to a company’s excess of the current assets over the liabilities that are also current, the changes in working capital is basically the difference in between the working capitals for two periods that were previously reported. These changes are being reported in statement of the cash flow since this is one of the most essential ways wherein net income can become different from the cash flow that is being operated. Through accruals system, the companies are able to calculate both the expenditure and revenue when one transaction happens instead of the time when cash will change some hands. Same changes in the current assets, like the accounts receivable as well as inventory, causes cash flow to be at variance from the net income. Cumulative effect from all current assets and liabilities are being captured in changes in the statement of the cash flow for the item of working capital. Since everything is set equal, there will be positive change for your working capital which will lead into cash flow that is lower as compared to the company’s net income.
Calculating change in net working capital is part of the operational cash flow since the companies commonly have assets and liabilities that are both current to decrease and increase for their ongoing operations to be funded. When there are increases in the current assets of a company, that would be cash outflow. If there increases in the current liabilities, that would be cash inflow.
For the Professionals
For most growing companies, the changes in capital are like capital spending in a small way. It is the invested money of the company which is designed to grow in the future. If the changes are of negative value, it only means that the investment of the company is growing heavily or there is something that went wrong in the process.