Net Working Capital (NWC) represents the difference between a company’s current assets and its current liabilities. It measures the liquidity position of a company and indicates its ability to meet short-term obligations using its short-term assets. The Schedule of Changes in Working Capital outlines the changes in various components of working capital over a specific period, typically between two balance sheet dates. Here’s how to calculate Net Working Capital and prepare a Schedule of Changes in Working Capital:
- Calculation of Net Working Capital (NWC):Net Working Capital (NWC) = Current Assets – Current Liabilities
- Current Assets include cash, accounts receivable, inventory, and other assets expected to be converted into cash within one year or one operating cycle, whichever is longer.
- Current Liabilities include accounts payable, short-term loans, accrued expenses, and other obligations due within one year.
Example:
If a company has current assets of $500,000 and current liabilities of $300,000, then:
Net Working Capital (NWC) = $500,000 – $300,000 = $200,000
This means the company has $200,000 in net working capital available to cover its short-term obligations.
- Preparation of Schedule of Changes in Working Capital:The Schedule of Changes in Working Capital outlines the changes in various components of working capital between two balance sheet dates. It typically includes changes in current assets and current liabilities, broken down by specific accounts.
Example Schedule:
sqlSchedule of Changes in Working Capital
---------------------------------------(Amounts in $)
Year 1 Year 2 Change
Current Assets
—————–
Cash 100,000 120,000 +20,000
Accounts Receivable 150,000 180,000 +30,000
Inventory 200,000 190,000 -10,000
Other Current Assets 50,000 60,000 +10,000
Total Current Assets 500,000 550,000 +50,000
Current Liabilities
————————-
Accounts Payable 100,000 110,000 +10,000
Short–term Loans 50,000 40,000 -10,000
Accrued Expenses 150,000 160,000 +10,000
Other Current Liabilities 100,000 120,000 +20,000
Total Current Liabilities 400,000 430,000 +30,000
Net Working Capital (NWC) 100,000 +20,000
In this example, the Schedule of Changes in Working Capital shows the changes in current assets and current liabilities from Year 1 to Year 2. The net change in working capital is calculated by subtracting the total current liabilities from the total current assets.
Net Working Capital (NWC) = Total Current Assets – Total Current Liabilities
By analyzing the Schedule of Changes in Working Capital, stakeholders can gain insights into the company’s liquidity position, operational efficiency, and changes in financial structure over time.