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Understand the importance of the net working capital to your company

Keeping a company running requires planning. Because of this, entrepreneurs dedicate a lot of time to develop studies that can help them with this mission. An example of this quest is to better understand the net working capital.

Not understanding its real importance can often lead the company to its closure. This is usually related to a lack of financial organization.

If you are not sure what this concept means, don’t worry. This article will explain what net working capital is, how to calculate it, how to prevent its deficit, and what factors affect this resource. Shall we?

What is the net working capital?

A company cannot wait for all its customers to pay their debts to keep operating, right? After all, it takes a few months to bring a return to investors after a business starts running. Even then, it has to bear the costs. During this period, what keeps the company running? The answer is: the working capital.

With this resource, it is possible for a trader to restock their store after selling almost everything, even if their customers have paid in installments, for instance.

Thus, the working capital is restricted to the amount needed to make the enterprise operate. In turn, the net working capital has an even more specific function.

It represents the assets your business has that can be turned into cash. Some examples include:

  • bank account balances;
  • amount in cash;
  • merchandise;
  • financial investments;
  • accounts receivable.

Therefore, it is a study that tends to reveal your company’s ability to continue operating, but also pay its debts.

How to calculate the net working capital?

The first step is to identify the current assets and liabilities. Current asset is an accounting term that shows all the goods a company has, in addition to all the capital it will receive in the short term (up to 12 months). This information is on the company’s balance sheet.

With it, we find the liquidity of the business. Note that each item in the current assets has its own liquidity.

Current liabilities are the part of the balance sheet that includes short-term debts (12 months). It usually refers to the payment of suppliers, taxes, financial charges, etc.

To know the amount of the current working capital, the following calculation must be made: Net Working Capital (NWC) = Current Assets (CA) – Current Liabilities (CL).

If the result of this calculation is negative, it could mean that the company will have to resort to third-party capital, such as a bank loan, in order to pay its debts.

 

Why is it important to know the net working capital?

The goal of an enterprise is to bring financial return to investors. That is why a company that cannot pay the bills needed for its operation will hardly be seen as a good investment.

In many cases, there is a demand for the product or service marketed, but because administrators don’t carefully study the company’s numbers, they make the wrong financial decisions.

A company needs the working capital to operate, and an entrepreneur has to know the net working capital amount in order to understand the debt capacity of a business, as this will determine the direction of investments, influence negotiations with suppliers, and reveal the liquidity of the company’s assets.

How to prevent the net working capital deficit?

Failing to control the net working capital can pose several risks to the organization. Your cash can become negative, which compromises the proper operation of the business. Therefore, it is important to prevent the deficit of these current assets in order to ensure a positive balance. To do so, it is simple. Here are some tips:

  • control defaulters;
  • know the company’s cash flow and financial cycle;
  • have all processes documented;
  • create a policy of reduction of costs and expenses.

So, if you don’t want to go through financial problems, try to ensure favorable conditions for your company to have enough money left, and thus, have net working capital. This is essential to meet customer needs and keep up with market growth.

What factors affect the net working capital?

Some situations affect the net working capital positively and negatively. Therefore, it is important that they are monitored and controlled in order to ensure the organization’s financial health. Check it out!

Positively affect

If the net working capital amount is positive, the business will have cash available to pay current liabilities in the short term. Some points that benefit this process include:

  • retained earnings;
  • increase in sales paid in cash;
  • reduction of deadlines for receipt;
  • increased availabilities;
  • decrease in taxes to be collected and in the balance of accounts payable;
  • extension of payment terms.

Negatively affect

When the net working capital is negative, the organization will certainly not have enough funds to pay off its short-term financial expenses. Check out what negatively influences this resource:

  • cash depletion;
  • unequal growth in indebtedness;
  • reduction of payment terms;
  • increase in terms offered.

Knowing these factors, pay attention to all the points mentioned that influence the net working capital. However, keep in mind that this current asset is not the amount of money needed for the company to operate, but the resource that verifies whether it is capable of financing itself in the short term.

Given this, it will be of little use for an enterprise to have good products, efficient marketing and an excellent team without working capital. Thus, without the health of this resource, all other efforts of the company will be jeopardized.

A tip to make the financial management easier and keep the net working capital stable is to rely on technology. Nowadays, there are several financial control software that assist in these processes, handle a large volume of data and offer the integration of the company’s sectors.

Now that you know what net working capital is, how important it is, how to prevent its deficit and what factors affect this resource, be sure to apply a strategic financial management and invest in technological tools. This will help increase your profitability, keep good process maintenance and control the company’s cash flow.

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