postheadericon Smart And Effective Options for the use of Net Working Capital

The net working capital (PSC) of an enterprise is the difference between current assets and current liabilities. It is also called operating, working capital, and in traditional terminology – the company’s own working capital (SOS). Let us have a look on what is net working capital and how it is calculated.

  • Net working capital can be calculated on the balance sheet in two ways: “from below” and “from above”.
  • When calculating from below, the PSC is part of the working capital that is covered by own funds and long-term liabilities.
  • PSC = current assets – short-term liabilities. (9.1)
  • When calculating from above, the PSC is the amount of long-term funds that remains to finance working capital.
  • PSC = permanent capital – non-current assets = (equity + long-term borrowed capital) – non-current assets

By the size of the PSC, you can judge whether the enterprise has enough permanent resources (own funds and long-term borrowings) to finance fixed assets (fixed assets), i.e. whether non-current assets are covered by such stable, reliable sources, which are the company’s own funds and long-term loans received by it.

  • PSC> 0. This means that the enterprise generates more permanent resources than is necessary to finance fixed assets. This surplus can serve to cover other needs of the enterprise. This situation is favorable for the enterprise. It is more reasonable to finance permanent assets with constant liabilities.
  • PSC <0. This means that the company does not have enough resources to finance non-current assets. The situation is unfavorable, but not catastrophic for the enterprise.

If large-scale investments in fixed assets have not yet paid off, then with a good project outlook, we can talk about a temporary shortage of SOS, which eventually disappears: – retained earnings will increase the capital of the enterprise. If the deficit of working capital is observed from year to year, then the situation is more risky.

  • Management of net working capital implies the optimization of its value, structure, values โ€‹โ€‹of its components.

With regard to the value of PSC, it is usually reasonable to increase it, as a positive trend. However, there may be exceptions, for example, growth due to bad debtors is unlikely to satisfy the financial manager.

 

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