Adding up all the assets and subtracting it with all the liabilities in running the business is called Net Working Capital.
This is basically the difference between all the working assets like cash, products to dispose, money in the bank minus mortgage, operating expenses, and loan payment.
More items can be added in the assets part, and conversely, more can be added on the liabilities part. If after calculating everything, the result is a positive number, that is the net working capital or NWC.
The higher the NWC is, the better. On the contrary, if the result is a negative number, that means the company is running at a deficit state and it is not a good figure at all.
Net Working Capital may be forecasted if the business owner is considering the receivables, cash on hand, payables, and expenses.
In order to identify whether or not a business is performing, numbers are supposed to be consolidated.
A recurrence of replenishing goods regularly with enough fund to spend is a good sign. This would mean that the business is going towards the right track. And it surely has an active net working capital.
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Characteristics of an Ideal Net Working Capital
There are too many factors in coming up the actual net working capital. Too many considerations must be included.
And there are a few points a business owner can look into in identifying areas which must be improved, for the purpose of a consistent positive running balance down the net working capital column of every business accounting book.
Here are some of the ideally anticipated entries in the line of net working capital:
Consistent Sales or Income from Goods
Daily sales percentage out of the sold items accumulates up to a monthly total.
Whatever the number of items disposed of during a regular inventory, with automatic fund received from consumers add up to the net working capital which will later on be calculated as the amount where liabilities will be deducted from.
If sales are consistent and it is sustained for a longer period of time, a guaranteed active net working capital is in place.
The goal is always to make more sales. Although this is dependent on the consumer’s choice, marketing contributes to that as well. Although the payment for a marketing can be considered a liability.
Ideally, if a sustained sales percentage showing on the balance sheet has been regularly showing a positive, that is an ideal NWC picture.
Standby Current Cash on Hand
Available business funds saved in the bank or in vault, while in standby, it is still considered a part of the net working capital. It may be a cheque or payment anticipated to be received from patrons, resellers or bulk buyers.
If it stays as is without being used for any expense whatsoever, this is another ideal scene to be considered when looking at the account’s logbook.
It is always a measure of how much fund is stable and untouched up until the next income counting time arrives.
A good businessman knows how to juggle assets so it benefits the business. One way or another, a good cycle of making it fluid for the sake of generating more income is still inclined to add up to the net working capital.
When the time comes for it to be used, it is just lying safe and ready for spending – probably for another investment essential for the business.
Fixed Receivables
Stable businesses already have created a foundation and a network to boost whatever funds has been up and about.
The network will likely be contributing to the growth of the business – either as the buyer themselves, or as referrer to the leads or the target audience the entrepreneurs have been targeting.
More often than not, there are already consistent orders coming in or regular stocks required by another business. When that is the case, a fix receivable is anticipated. It can be added to the net working capital column.
Ideally, a specific number of fixed receivables from regular orders is something that is coming in without a miss. When the total amount adds up, it will be a good tally to see, from a business owners’ perspective.
Are Liabilities Good?
To answer this old-age question, someone must have been exposed to the business and progress of economy in order to provide a reliable response.
When a businessman has to pay for rent in order to run the business, this part is non-negotiable.
So, it becomes a good thing. As long as liabilities are less than the assets, and the business is going steady, this is not a problem, at all.
Most business owners have to lease a real estate in order to conduct business. Now, why rent when they can own?
Starters normally have limited funds. Either they have capital only for the business but not for a place for them to be seen.
Other considerations are commercial spaces where such businesses are visible to prospective clients. To answer the question, yes liabilities are good, provided it is way less than the total assets.
Here are some of the inevitable liabilities:
Lease
A place to conduct business is one of the most important considerations before starting the entrepreneurial venture. You cannot have your business at home when your clients are out there in the open, say in a public place.
Machineries
When the business is inclined in manufacturing goods, it is likely that huge machines are paid in instalment. When it is, it must be paid in a regular basis. Until it is paid off, it will stay a liability. Once fully paid, it becomes an asset.
Business Loan
Entrepreneurs take the risk of owing financing institutions like a bank or an online lender a loan to roll over their business. It becomes a liability as it incurs interest which must be paid and will be deducted off the assets.
Salary
Employees generate the income of the business, alongside the products that are being sold. This is another inevitable liability as a business will likely not survive without them.
