Finimpact

Conclusion

The vast majority of businesses view working capital and net working capital as being the exact same metric but some companies may use alternative calculation methods for working capital vs net working capital. The most important thing to remember is that when someone is talking about working capital; they’re referring to a financial metric that subtracts the company’s liabilities from its assets. 

FAQ

Why is Working Capital Important?
Working capital is important for a number of reasons. It’s basically the funds that help keep your company running on a short-term basis. It’s necessary to fund operations, pay employees, pay vendors, and even just keep the lights on. Working capital can help cover your financial obligations; and managing it well can help increase future earnings.
What Are The Limitations of Net Working Capital?

Some of the limitations of net working capital include:

  • Using improper calculations and thinking you have more available capital than you really do

  • If the company’s accounting statements aren’t accurate, the net working capital won’t be properly accounted for

  • Can give a false sense of security

  • A company’s liquidity can change anytime and this may not immediately be accounted for 

Is Negative Working Capital Bad?
The goal is always to have positive working capital, but some companies may have negative working capital temporarily, and it’s not always a bad thing. The company may have just made a large purchase, invested in more inventory, or updated equipment. However, it’s important to get back to positive working capital as soon as possible so you can meet your short-term obligations, and payroll etc. If a company continues to have negative working capital, it means that its liabilities are exceeding its assets and it may be headed towards bankruptcy, have to be sold, or shut down etc.
How is Operating Capital Different From Net working Capital?
Operating capital focuses on day-to-day operations and is a narrower measure than net working capital. Net working capital takes into account all assets and liabilities and gives a more thorough calculation of the company’s finances. Operating capital may be used to determine if a company can remain solvent and net working capital can help a company evaluate potential investments.

About the Author

Allison Bethell

Allison Bethell

Real Estate and Finance Expert

Allison Bethell is a content writer, real estate investor, small business owner, and consultant. She has a B.A. from Villanova University in Sociology and Business. She also holds several graduate certificates in early childhood development, screenwriting, and contract law.

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