How to Calculate Net Working Capital (NWC)

How to Calculate Net Working Capital (NWC)

Welcome to Taxmaninfo friends, today we are going to learn a concept that is net working capital formula now let's understand what exactly this is the net working capital formula is the total current assets divided by the total current liabilities. 

Now this is just the formula again this is a very important formula for not only for the Board of Directors order to be stakeholders but investors have a really a great pinpoint on this particular form on this particular ratio so why it is important let's evaluate let's start with the basics. 

Let's understand the formula first and then move to the next thing in simple terms the net working capital denotes the short term you can say the short term liquidity of the company we can do the net capital calculation simply by adding the current assets by and deducting the current liability let's have a look at the formula and try and understand the networking Capital is equal to your total current assets less your total current liabilities.

Let's understand an example on this and we'll try and evaluate the things let's say there's a company called Reliance or let's say there's a company called HUL they have some Details like sundry creditors as let's say Rs.45,000 and they have Sundry Debtors has Rs.55,000 we have another item in this that is Inventories which will be close enough to Rs. 40,000 and prepaid salaries which is let's say Rs.15,000 be final then the most final thing that is the outstanding advertisements which is let's say Rs.5,000.

So find out the networking capital of HUL see in the above example we have been given the both the current assets and the current liability. First we need to separate the current asset from the current liabilities then we need the total up the or need to sum up the current assets and also the current liability and we'll get we need to find the difference between the current assets and current liabilities. So what does the current assets include your current asset includes your Sundry Debtors, your inventories, any prepaid salaries and in case of current liabilities it includes your sundry creditors and any outstanding advertisement or salary expenses.

So let's sum up and find the net working capital or let's first find out the total current assets the total current assets is going to be your debtors, your inventories and your prepaid salaries and your current liabilities is going to be your Sundry Creditors plus any outstanding advertisement expense so your net working capital is going to be your current assets less your current liabilities which is Rs.60,000 (55000+40000+15000-45000-5000).