Net working capital: a management formula
Net working capital of the firm is calculated asthe difference between current assets and liabilities. In the usual sense, working capital is often equated with current assets. Similarly, current assets in the Russian balance sheet as a whole coincide with the concept of the current asset, despite the fact that accountants often identify working capital with pure working capital.
They also operate with the concept of working capital,provided with operating activities. This economic category, which is also called the flow of funds received from operations, is related to the amount of non-monetary costs and net profit.
Current and net current assets and liabilities
Current assets include what can beshort enough period to turn into money. Current liabilities are obligations that must be repaid in the near future. In the Russian accounting standard, an explanation can be found for such a delimitation of liabilities and assets. It is assumed that short-term and long-term values are delineated by a one-year time interval. However, in order to develop, plan and analyze financial policies, the organization often adopts its own time criteria. Everything depends on the direction of its work, the profitability of its products and its position in the market.
Less significant criteria for companies,which require a rapid turnover of funds, for example, retail. And, on the contrary, for organizations with slow turnover, for example, shipbuilding, these indicators take on greater importance. A very important issue for the company is the coordination of payments on short-term assets and receipts on short-term obligations.
An internal source that replenishes the pureworking capital, unallotted profit and other accumulations, deferred or non-monetary costs, such as tax arrears, depreciation and sale of fixed assets. External sources, replenishing working capital, include trade and bank short-term loans, securities issue and other loans, funds from which were not invested in fixed assets.
Net working capital: a management formula
An important task of the economic policy of the companyis the management of net working capital. The reason for this lies in the fact that the net working capital - this is not entirely accurate, but still characteristic of the liquidity of the firm, its ability to fulfill obligations, guarantee the inadmissibility of bankruptcy. If the current short-term liabilities exceed the assets, we can say that the risks of the company's insolvency are significantly increased.
In addition, a large number of net workingcapital can talk about a significant accumulation of unpaid receivables or illiquid, unrealized stocks (current liquidity equals the ratio of current assets and liabilities). This factor is the reason why net working capital can not be an accurate characteristic of the firm's stability.
In addition, stocks, which are an important part of thecurrent assets can be estimated using different methods, as a result, the working capital can vary significantly. There is some regularity that shows that an increase in working capital means both an increase in the shareholders' well-being, a decrease in fixed capital, or an increase in long-term debt.
Thus, the management of a net spin-offCapital must solve the problem of finding the best balance between profitability and liquidity. Typically, current assets have better liquidity, but less profitability, unlike fixed assets.
