The net working capital of a company denotes the difference between the current assets and current liabilities. Items like cash and accounts receivable constitutes current assets. Items like accounts payable constitute current liabilities. The loan that finances the daily operations of a company is termed working capital loan. Long-term assets or investments cannot be bought making use of these loans. You can use it to clear up accounts payable, wages and the like. How to calculate net working capital on cash flow is given below. Read on in order to know more.
How to calculate the net working capital on cash flow
- The first and foremost thing that you have to do is find out the amount of a company’s current assets as well as current liabilities as far as its latest balance sheet and the balance sheet of the previous accounting period are concerned.
- Following which, you have to subtract the current liabilities of the company from its current assets as far as the previous accounting period. For instance, $200,000 in current liabilities has to be subtracted from $450,000 in current assets. You will get $250,000 as net working capital for the last accounting period.
- It is then required that you subtract the current liabilities from the current assets taking into account the latest accounting period. For instance, $250,000 in current liabilities needs to be subtracted from $350,000 in current assets. You will get $100,000 as net working capital for the last accounting period.
- After that, subtract the net working capital of the previous period from the net working capital of the latest period to find out how much the net working capital has changed. An increase in net working capital is indicated by a positive number. A decrease in net working capital is indicated by a negative number. For instance, you have to subtract $250,000 in net working capital in the last period from $100,000 in net working capital in the current period. The answer is negative $150,000. This indicates a $150,000 decrease in net working capital between the two periods. $150,000 is added to the cash flow of the company from operations for the accounting period.
I am sure you now understand how to calculate the net working capital. Some essential information about working capital loan has also been provided here.