Definition of Net Working Capital
Net working capital, which is also known as working capital, is defined as a company’s current assets minus itscurrent liabilities.
Examples of Changes in Working Capital
If a company’s owners invest additional cash in the company, the cash will increase the company’s current assets with no increase in current liabilities. Therefore working capital will increase.
If a company obtains a long-term loan to replace a current liability, current liabilities will decrease but current assets do not change. Therefore working capital will increase.
If a company uses its cash to pay for a new vehicle or to expand one of its buildings, the company’s current assets will decrease with no change to current liabilities. Therefore working capital will decrease.
If a company sells merchandise for $50,000 that was in inventory at a cost of $30,000, the company’s current assets will increase by $20,000. If no other expenses are incurred, working capital will increase by $20,000.
If a company borrows $50,000 and agrees to repay the loan in 90 days, the company’s working capital is unchanged. The reason is that the current asset Cash increased by $50,000 and the current liability Loans Payable increased by $50,000.
If a company collects $30,000 of its accounts receivable, there is no change in working capital since the current asset Cash increased, and another current asset Accounts Receivable decreased.
