Changes in Net Working Capital
“Changes in the net working capital” of the company is the increase or decrease in the net working capital of two accounting periods. The increase may be due to an increase in current assets or a decrease in current liabilities. Same way, the decrease may be due to an increase in current liabilities or a decrease in current assets. Before moving forward, let us first try to understand what is net working capital.
Net Working Capital
It is the difference between the company’s current assets (CA) and current liabilities (CL). Working capital is a source of funds for short-term expenses. A company holds current assets for a period equal to or less than twelve months. These include inventory, trade receivables, prepaid expenditures, cash and cash equivalents, short-term investments, and other current assets. And current liabilities of the company also stand for a period of lesser than 12 months. These current liabilities include trade payables, short-term borrowings, and other current liabilities.
Formula
Changes in net working capital can be calculated by subtracting the previous year’s net working capital from the current year’s. To present it mathematically,
Changes in Net Working Capital = Net Working Capital of Current Year – Net Working Capital of Previous Year
Or,
Changes in Net Working Capital = (Current Assets of Current Year – Current Liabilities of Current Year) – (Current Assets of Previous Year – Current Liabilities of Previous Year)
About the Changes in Net Working Capital Calculator / Features
It is a handy calculator which quickly calculates the value by simply entering the following data into it:
- Current assets & liabilities of the current year
- Current assets & liabilities of the previous year
Calculator
How to Calculate using Calculator
Simply insert the following details into the calculator, which will provide the result by pressing the calculate button.
Current Assets & Liabilities of Current Period
These values can be obtained from the balance sheet of the current period.
Current Assets & Liabilities of Previous Period
The values of current assets and current liabilities of the previous period can be obtained from the previous year’s balance sheet. This can be made available from the current year’s balance sheet because usually, as per the standard format, details of the current and previous year are given simultaneously in the same balance sheet.
Example
Let us take an example for a better understanding. The following are the details of CA and CL of X Inc.
| Particulars | Current Period | Previous Period |
| Current Assets ($) | 36,000 | 38,500 |
| Current Liabilities ($) | 23,500 | 29,000 |
Firstly, we need to calculate net working capital for both periods.
| Period | Net Working Capital | Calculation |
| Current Period | 12,500 | 36,000 – 23,500 |
| Previous Period | 9,500 | 38,500 – 29,000 |
Now, Changes in Net Working Capital = 12,500 – 9,500 = 3,000
In this example, net working capital has increased by 3,000. This change in working capital is reflected in the cash flow statements to calculate cash flows from operations. An increase in net working capital means cash outflow and vice versa. Therefore, an increase here is a negative figure, and a decrease is a positive figure in the statement of cash flows.
Interpretation
An increase depicts that the requirement of working capital has increased in the company, and a decrease means the company has freed a portion of working capital. This increase/decrease may be due to various reasons like changes in the credit policy of the company, stock levels, payment period, and much more.
