What Is Net Working Capital?
What is net working capital?
Net working capital, also known as narrow working capital, refers to the balance of the total assets of the enterprise minus all kinds of current liabilities. That is to say Long-term The amount of current assets purchased by debt financing.
The role of net working capital
Net working capital is considered to be an investment in the enterprise's illiquid assets and for the repayment of non current liabilities.
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Therefore, net working capital is mainly concerned with the solvency and financial risks of enterprises.
Use
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The net working capital status of an enterprise is very important to the internal management of an enterprise, and it is also an index widely used to measure the financial risk of an enterprise, which will affect the ability of debt financing of an enterprise.
The appropriate level of net working capital depends on the degree of adaptation between cash inflows and cash outflows.
Net working capital can measure the liquidity of enterprise funds.
The debt of an enterprise should be paid by liquidating assets. In this sense, current assets are the cash sources of enterprises, while current liabilities are the cash expenditures of enterprises.
From the perspective of financing, net working capital is raised by long-term funds of enterprises. Since the long-term capital cost is greater than the capital cost of current liabilities, the increase of net working capital of enterprises will increase the total capital cost of enterprises and reduce the profits of enterprises. However, the increase of net working capital can enable enterprises to support long-term assets in the form of long-term capital, which is conducive to timely repayment of short-term liabilities and reduce the possibility of enterprises unable to pay debts, thereby reducing the risk and increasing liquidity of enterprises.
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