Net working capital negative value. What is net working capital? Net working capital: calculation formula

The level of efficiency of the activities performed by the enterprise is determined by various factors. But there is a certain component of the company, which can be described as one of the key indicators of the prospects of the enterprise. It is its definition that makes it possible to identify the level of stability and the prospects for the development of the organization.

Net working capital

Initially, working capital should be understood as those elements of resources that are used for a relatively short time, while their cost is part of the costs necessary to produce a new product.

Working capital can also be described as the value expression of those objects of labor that are necessary for the production process, moreover, once. It is important to understand that their cost is transferred to the cost of the goods produced.

Funds used in circulation can be divided into two key types: cash and inventory. These groups include the following resources:

• costs in the process of work in progress;
• materials, fuel, raw materials, energy, spare parts, semi-finished products;
• expenses relating to future periods;
• finished goods and products;
• receivables, the terms of which do not exceed 1 year;
• VAT on purchased assets;
• other current assets.

If we consider net working capital in the context of the above concepts, then it is worth noting that it can be defined as the difference between current liabilities (accounts payable) and assets (working capital). Using this indicator, you can identify the extent to which current assets are covered by long-term sources of funds.

You can use another characteristic of net current assets: it is capital that characterizes that part of the resources in circulation, for the formation of which long-term borrowed and equity capital was used.

Net working capital - formula

This type of capital can be calculated using a fairly simple formula:

CHA \u003d OA - KFO,

Where NAV is defined as the sum of the organization's net current assets;

ОА - the sum of current gross assets of the company;

KFO - current short-term financial obligations of the enterprise.

There is another formula that allows you to calculate net working capital:

SOA \u003d OA - DZK - KFO.

SOA should be understood as the amount of the company's own working capital. OA is the sum of the gross current assets of the enterprise. As for S/As, in this case we are talking about long-term borrowed capital that was invested in the company's current assets. CFA is used to refer to the organization's current (short-term) financial liabilities.

In the case when the organization resorts to the help of long-term borrowed capital, the amount of equity and net resources are the same.

The need to use net working capital

In addition to defining this type of resource, it makes sense to understand the reasons for its relevance to the enterprise. The calculation of this type of capital is important, since it is this category of assets that allows you to maintain the financial stability of the company. This can be explained by the fact that an organization that does not have sufficient resources to meet short-term obligations is not able to pay off such obligations. And if the level of own working capital exceeds the required minimum, the company will be able to create certain reserves to expand its activities.

But at the same time, the following fact should be taken into account: in the event that the level of working capital significantly exceeds the optimal needs of the organization, it makes sense to talk about the irrational distribution of the company's resources. For this reason, this value of net working capital should be constantly analyzed. This is a kind of control of the company's management of the degree of relevance of the developed strategy for using the company's own funds.

Liquidity ratio

It is net working capital that is used as such an indicator within the organization. Such indicators are needed to determine the degree of solvency of the organization (meaning short-term debts). Their essence boils down to the fact that the value of the company's working capital and its ability to pay short-term debt are compared.

Obviously, if there is an increase in equity, then this can be defined as a positive fact, since this leads to an increase in the liquidity of the organization and its solvency. Demonstration of such dynamics is very important in the process of company development, since these indicators have a positive effect on the level of loyalty of creditors in relation to the enterprise, which is considered as a potential borrower.

How to increase own working capital

This is one of the most pressing questions for a company that intends to experience continuous growth. To achieve this goal, it is necessary to initially build a system for the efficient use of available resources. This implies the correct calculation of the period of stay of net capital in the production sphere of the enterprise and in the circulation (circulation sphere), as well as the economical use of such objects of labor as materials, raw materials, etc.

It is important to understand the fact that the amount needed to generate funds will be lower if the residence time of this type of capital in the production process is reduced.

This means that if the turnover of these funds is accelerated, the company will reach a high level of liquidity much faster. This fact will attract more investment. To achieve the above acceleration, it is necessary to develop and implement measures that can significantly reduce the time during which net working capital is in transit (delivery), in production inventories, in the production process itself and in warehouses where finished goods are stored. If such a goal is achieved, products will be able to be sold in large volumes, which will reduce the amount of expenses required to form own funds.

Conclusion

It is difficult to overestimate the importance of own funds for the development of an enterprise. Therefore, you should always remember that net working capital is equal to the actual level of liquidity of the company.

Do not forget about those measures that can significantly improve this indicator of the organization. In general, it is the well-organized activity of the organization that allows to ensure the stable growth of the company and increase its investment attractiveness.

Net working capital (NWC) of an enterprise is the difference between current assets and current liabilities. It is also called working, working capital, and in traditional terminology - the company's own working capital (SOS).
Net working capital can be calculated on the balance sheet in two ways: "from below" and "from above"
When calculated from the bottom, PFC is the part of working capital that is covered by own funds and long-term liabilities
NFR = current assets - short-term liabilities. (9.1)
When counted from above, NCF is the amount of long-term funds that remains to finance working capital.
NCF = fixed capital - non-current assets = (equity + long-term debt capital) - non-current assets
By the value of the NFC, one can judge whether the enterprise has enough fixed resources (own funds and long-term borrowings) to finance fixed assets (fixed assets), i.e. whether non-current assets are covered by such stable, reliable sources as the company's own funds and long-term loans received by it.
NCF > 0. This means that the enterprise generates more fixed resources than is necessary to finance fixed assets. This surplus can be used to cover other needs of the enterprise. This situation is favorable for the enterprise. It is most reasonable to finance permanent assets with permanent liabilities.
PSC If large-scale investments in fixed assets have not yet paid off, then with a good project perspective, we can talk about a temporary lack of SOS, which will disappear over time: - retained earnings will increase the capital of the enterprise. If the lack of working capital is observed from year to year, then the situation is more risky.
Management of net working capital implies the optimization of its size, structure, values ​​of its components.
As for the value of the NCF, usually a reasonable increase is considered as a positive trend. However, there may be exceptions, for example, growth due to bad debts is unlikely to satisfy the financial manager.
From the point of view of factor analysis, it is customary to single out such PFC components as inventories, receivables, cash and short-term liabilities, i.e. the analysis is based on the following model:
NCHK = OA - KO = Reserves + DZ + DS - KO, (9.2)
where ОА – current assets;
KO - short-term liabilities;
DZ - accounts receivable;
DS - cash.
All components are certainly important in the model, however, from the standpoint of effective management, current assets play a special role, since they serve as collateral for debt.
Money is invested in stocks of raw materials and finished products. As long as raw materials have not been transformed into finished products, and finished products into money in the account, stocks, by their very existence, create a need for financing;
In receivables, the need for working capital is also embodied. Until the goods are produced, stored, shipped and paid for by the buyer, this need requires appropriate satisfaction;
Cash and cash equivalents are the most liquid part of working capital, they are cash on hand, on settlement and deposit accounts. DS equivalents include short-term financial investments; it is not always easy to choose between them; free cash is good, but the costs of storing temporarily free unused funds are much higher than the costs associated with investing money in securities
Short-term liabilities are the obligations of an enterprise to suppliers, employees, banks, the state, etc., with the main share falling on short-term bank loans and unpaid bills of other enterprises.
If it is low, production activities are not properly supported, hence the possible loss of liquidity, periodic disruptions in work and low profits. At some optimal level of FER and its components, the profit becomes maximum, and any deviation is undesirable. An unjustified increase in the amount of working capital will lead to the fact that the company will have temporarily free idle current assets, as well as excessive costs of their financing, which will lead to a decrease in profits.
Therefore, PSC management policy should provide a trade-off between liquidity risk and operational efficiency. Two tasks need to be solved:
1. ensuring solvency - with an insufficient level of PFC, the enterprise may face the risk of insolvency
2. ensuring an acceptable volume, structure and profitability of assets.
The search for a compromise between profit, the risk of loss of liquidity and the state of working capital and sources of their coverage involves familiarity with various types of risk. The risk of loss of liquidity or decrease in efficiency, due to changes in current assets, is commonly called left-handed, since these assets are placed on the left side of the balance sheet. A similar risk, but due to changes in liabilities, by analogy is called right-handed.
We can distinguish the following phenomena that potentially carry a left-sided risk.
1. Insufficiency of funds. The enterprise must have cash to carry on day-to-day activities, in case of unforeseen expenses and in case of probable effective investments. Lack of funds at the right time is associated with the risk of interruption of the production process, the possible default on obligations or the loss of possible additional profit.
2. Insufficiency of own credit opportunities. When selling goods on credit, buyers can pay for them within a few days or even months, resulting in the formation of receivables at the enterprise. On the one hand, the growth of receivables indicates an increase in potential income and increased liquidity. On the other hand, unjustified receivables represent the immobilization of own working capital, and exceeding a certain limit may also lead to a loss of liquidity and a stop in production.
3. Lack of inventories. The enterprise must have a sufficient amount of raw materials and materials for an efficient production process; finished products should be enough to fulfill all orders, etc. Non-optimal inventory levels are associated with the risk of additional costs or production stoppages.
4. Excessive volume of current assets. Since the value of assets is directly related to financing costs, maintaining excess assets reduces income. There are various reasons for the formation of surplus assets: slow-moving and stale goods, the habit of "to have in reserve" and others.
The most significant events that potentially carry a right-sided risk include the following:
High level of accounts payable. When an enterprise acquires inventories on credit, accounts payable are formed, with certain repayment periods. It is possible that the entity has bought more inventory than it needs in the near future and therefore, with significant credit and idle excess inventory, the entity will not have sufficient cash to pay the bills, which in turn leads to a default.
Sub-optimal mix between short-term and long-term sources of borrowings. Sources of coverage for current assets are both short-term accounts payable and fixed capital. Although long-term sources tend to be more expensive, in some cases they can provide less liquidity risk and greater overall efficiency.
High share of long-term debt capital. In a stable economy, this source of funds is relatively expensive. Its relatively high share in the total amount of sources of funds also requires large expenses for its maintenance, i.e. to a decrease in profits. This is the other side of the coin: excessive short-term accounts payable increases the risk of losing liquidity, while an excessive share of long-term sources increases the risk of reducing profitability.

Net working capital- the formula for the lines of the balance sheet is used to study the dependence of existing short-term (current) assets on external current sources of financing. In other words, the indicator determines whether the enterprise has liquid assets that do not need to be used to repay borrowed funds.

Net working capital on the balance sheet

Net working capital in the balance sheet is not indicated as a specific value or line - it involves the use of balance sheet indicators for the purpose of calculating it. This capital is formed at the expense of own funds or resources equivalent to them, aimed at the acquisition of current assets.

To calculate the net working capital, it is necessary to remove short-term liabilities from working resources, for the repayment of obligations for which a part of these resources can be directed. It is this difference that will make up the amount of net current assets that determine the economic stability of the organization.

Calculation of net working capital - balance sheet formula

The balance sheet is used to calculate this indicator, and in doing so, it is necessary to do this:

CHOK \u003d OA (p. 1200) - KP (p. 1500),

CHOK - net working capital;

OA - current assets, the value of which can be found in the balance sheet on line 1200;

KP - short-term liabilities, the value of which in the balance sheet can be found on line 1500.

Interpretation of the received value in the analysis

The evaluation of the received NRC value is made according to the following logic:

1. If the calculation led to a positive result (the excess of working capital over liabilities), we can talk about good financial stability and solvency of the enterprise, since its own working capital is enough for the full implementation of current activities without attracting borrowed resources.
2. If the calculation led to a negative result (excess of liabilities over working capital), financial instability should be noted, since the company's own working capital is not enough to carry out current activities, and therefore it is necessary to attract borrowed resources.

IMPORTANT! In some cases, a too high value of the net current assets indicator may indicate that the company does not effectively use the available free working capital at its disposal: it does not invest in activities, does not invest in order to generate income, and so on. Or, such an excess may indicate that long-term borrowings are used to finance working capital. This fact should also be considered as negative in terms of assessing the financial stability of the enterprise.

Definition: A key part of financial modeling is balance sheet forecasting. Working capital refers to the components of balance sheet items. The definition of working capital (shown below) is very simple:

Working Capital = Current Assets - Current Liabilities

A current asset is an asset that can be converted into cash within a year. Current liabilities are debts that must be paid within a year.

Current assets	Current responsibility
Cash Marketable securities Accounts receivable Inventory Prepaid expenses	Accounts payable Accrued expenses deferred income Short term debt Current portion of long-term debt

For example, below is the balance sheet of Campbell Soup, an American company that sells food products worldwide. As of July 30, 2017, the company had $1,900 million in current assets and $2,395 million in current liabilities, with a negative net working capital balance of $495 million.

current assets
Cash	$319
Accounts receivable	$605
Stocks	$902
Other assets	$74
Total	$1,900
fixed assets	$2,454
Goodwill	$2,115
Other intangible assets	$1,118
Other assets	$139
Total Assets	$7,726
Current responsibility
Short term loans	$1,037
Accounts payable	$666
Accumulated liabilities	$561
Dividends payable	$111
Accumulated taxes	$20
Total	$2,395
Long-term debts	$2,499
Deferred taxes	$490
Other	$697
Total Liabilities	$6,081
Capital	$1,645
Total Liabilities and Equity	$7,726

Current and quick liquidity ratios

The financial ratio that analyzes working capital - is defined as current assets divided by current liabilities and is designed to test the company's liquidity:

This ratio is of limited use out of context, but the general consensus is that more than 1 implies that the company is reasonably liquid, as it has liquid assets that are likely to be convertible into cash and able to pay off future short-term liabilities.

Another similar ratio is , which includes only the most liquid assets (cash and receivables) to assess liquidity. The advantage of ignoring inventory is that inventory can take a long time to sell, so quick liquidity ignores inventory:

Working Capital Interpretation

What does working capital tell us? Let's continue with our Campbell Soup example. What does the company's $495 million negative working capital balance tell us?

First, it tells us that over the next year it is necessary to pay off liabilities that exceed current assets by $495 million. This may seem like a wake-up call. The company may need to either raise funding or sell equipment and other long-term assets.

However, the same negative working capital balance may indicate something else, namely healthy and efficient working capital management where accounts payable, receivables and inventory are closely monitored to ensure inventory is sold quickly and cash is raised quickly, allowing bills and other expenses to be paid. as they come, without accumulating wasted funds. In addition, Campbell Soup may have an undrawn line of credit with sufficient borrowing capacity to address unexpected liquidity shortages.

In fact, here's how Campbell Soup explains its negative working capital:

“Current assets are less than current liabilities as a result of approaching the maturity date of long-term liabilities. The company aims to reduce net working capital by reducing accounts receivable and inventory levels, while at the same time increasing the grace period for accounts payable.”

Working capital management

For many firms, analysis and management of the operating cycle is the key to improving business stability. For example, imagine that a phone retailer has ordered too many models to sell - its cash will subsequently be limited and not available for spending on other things (such as updating fixed assets and paying salaries). What's more, the store will need larger warehouses, pay for unnecessary storage, and have no room to store other inventory.

Imagine that, in addition to buying too many phones, a retail store gives customers a deferral to pay for mobile devices (perhaps to attract customers). This increases the amount of time to raise funds and adds uncertainty and risk.

Now imagine that a store retailer alleviates these problems by paying for inventory on credit (often necessary since stores only receive funds when they sell items). Cash is used more, but effective working capital management is even more important as the store may be forced to cut product prices more aggressively (lower margins or even take losses) to sell inventory to meet supplier payments and avoid penalties.

Collectively, this process is the operating cycle (also called the cash cycle). Companies with high net working capital must carefully and actively manage inventory to avoid inefficiencies and possible liquidity problems. In our example, a perfect storm might look like this:

1. The store bought a lot of stock on credit with short maturities.

2. Economy slows down, customers don't pay as fast as expected

3. Demand for the store's products is changing and some phones sell out quickly while others don't sell at all.

It may happen that a retail store does not have funds to replenish stocks that are in huge demand because they have not been able to collect enough funds from customers. Suppliers who have not yet been paid are unwilling to provide additional credit and demand even less favorable terms. In this case, the store may use a bank line of credit, borrow money, or even liquidate assets. The risk is that, when working capital is poorly managed, last-minute sourcing of liquidity can be costly, detrimental to business, or, at worst, impractical.

conclusions

The above section describes all the components that together make up working capital. The example highlights why these elements are often described together as working capital. While each component (inventories, receivables and payables) is important individually, together they form the operating cycle for a business and therefore must be analyzed both together and individually.

Working capital as useful:

1) when compared to competitors,

2) used along with other activity ratios (inventory turnover, receivables turnover, etc.)

Collectively, executives and investors gain useful insight into short-term liquidity and business performance.

Own working capital(own working capital) includes the amount of current assets, which remains at the disposal of the company after the moment of full, one-time repayment of short-term debt.

Own working capital calculated in various ways, when determining it, indicators of the balance sheet are used.

Own working capital

It characterizes the volume of own (equivalent to them) funds of the enterprise, which are directed to the financial support of current assets.

By analyzing the indicator calculated according to the formula of own working capital on the balance sheet, you can take timely optimization measures and begin to improve the efficiency of the enterprise.

Payment working capital produce in accordance with sections of the balance sheet (II and V)

In this case, the formula for own working capital according to the balance sheet is as follows:

JUICE \u003d TA - TO

TA - the amount of current assets,

TO - the amount of current liabilities.

The second option for calculating own working capital will be a formula that uses indicators I, III and IV of sections of the balance sheet. The formula for own working capital on the balance sheet in this case is as follows:

JUICE \u003d SC + DO - VNA

Here SOC is the amount of own working capital,

SC - equity (from section III of the balance sheet),

DO - the amount of long-term liabilities (from the IV section of the balance sheet),

VNA - the amount of non-current assets (from section I of the balance sheet).

Composition of working capital (assets)

Section II of the balance sheet (“Current assets”) reflects 6 main lines containing the most liquid assets (the property that is easily converted into cash). As part of working capital, the most effective in terms of availability are cash, which can be paid at any time for the resources required for current activities.

In addition to cash, working capital includes cash equivalents (assets that quickly turn into money). An example of a cash equivalent is a short-term demand bank deposit (up to 3 months). If there is no cash, then this asset can be most quickly used and turned into money.

When calculating working capital, indicators of the balance sheet asset also take part:

• stocks,
• Amount of accounts receivable.

These two indicators are the least liquid in comparison with money. In order to convert them into money, additional expenditures of time and effort are required.

Formula value

The formula for own working capital on the balance sheet allows to evaluate the amount of own and equivalent funds. Further, these funds are used to finance current assets.

The value of own working capital can be positive and negative, and also be equal to zero. Insufficient amount of own working capital leads the company to the inability to timely repay short-term liabilities and further insolvency.

This situation occurs for the following reasons:

• low efficiency of asset use;
• presence (growth) of remains of unfinished construction;
• increase in the amount of receivables;
• unprofitability of the enterprise, etc.

The work of the enterprise is negatively affected not only by the lack of its own working capital. But also its excess. So, if the indicator of equity capital to a large extent exceeds the optimal need for it, then the efficiency of the company's use of its resources can be considered low.

Zero working capital may be a new enterprise or a company whose activities are financed solely by borrowed capital.

Examples of problem solving

Net working capital is an indicator that should be calculated to find out the company's ability to repay its obligations in the short term (12 months). With its help, you can calculate the "airbag of the enterprise."

Working capital in the balance sheet - the concept and calculation formula

If it is below zero, the company has lost its solvency. A low NCF is a sign of impending bankruptcy. A surplus of NWC is evidence of inefficient use of resources.

A company can be confident in the stability of its financial position if it has a "safety cushion" in the form of net working capital. The positive value of this indicator is a key condition for the financial stability of the company, its liquidity and solvency.

Net working or working capital (Net Working Capital - NWC) is a financial indicator that represents the difference between current assets and current liabilities. This is part of current assets, which are formed from long-term sources of financing.

	Indicator	Components	Decryption
	Current assets	Short-term accounts receivable; inventory; VAT on purchased goods; Cash; Short-term financial investments.	Part of the balance that the company plans to turn into cash during the year
	Current responsibility	payroll arrears; Debts to resource providers; Unliquidated obligations to the budget and extra-budgetary funds; Short term loans; Interest payments on long-term loans; Revenue of the future periods; Reserves for future expenses.	Debts that the business entity will repay in the short term (within a year)

In the event that a company has to pay off all of its short-term debt at a time, it will have net working capital (NWK). Even if all creditors demand repayment of the current debt, the enterprise will continue its normal functioning without the threat of bankruptcy.

Formula for calculating net working capital

In order to calculate the amount of net working capital, it is necessary to subtract from the indicator of current assets the value of current liabilities on a certain date. All information for the calculation is taken from the balance sheet of the company.

CHOK \u003d OA - TO, where

CHOK - net working capital;

JSC - current assets;

TO - current liabilities.

The formula for calculating net working capital can be written according to the lines of the balance sheet:

CHOK \u003d art. 1200 - Art. 1500

Normal NWC value

Working capital is the main criterion for the financial stability of a company from any industry. However, it is important not only to have a difference between current assets and current liabilities, but also its magnitude.

Important point! The optimal amount of PFC depends on the characteristics of the functioning of the enterprise - the industry of its activity and its scale. The need for net working capital is determined by the amount of resources needed to maintain the normal functioning of the organization.

• If NWC is greater than the optimal need for it, then the company is inefficiently using its resources - it is overstocked, has an impressive receivables, and does not use the opportunity for a profitable investment.
• If NWC is less than the required value, then a threat to the financial stability of the enterprise is formed.

How to calculate NFR: examples

Conclusion! In 2015, the amount of working capital increased. The company's desire to use resources more efficiently next year led to a deterioration in its solvency. In the short term, it may be unable to meet its current liabilities.

Figure 1. Dynamics of NWC for PJSC NK Rosneft in 2014-2016, billion rubles

The dynamics of working capital shows the loss by the oil corporation Rosneft of its "airbag" in 2016.

Conclusion! The value of the indicator grows, therefore, the financial stability of the enterprise and its ability to meet its obligations in the short term increase.

Figure 2. NWC dynamics for PJSC Kamaz in 2014-2016, million rubles

The dynamics of the coefficient calculated on the basis of the balance sheets of Kamaz PJSC for 2015 and 2016 showed its growth. For such a large engineering giant that requires a significant amount of resources to ensure stable operation, the growth of NWC is a very favorable trend.

How to manage CHOK?

Working capital needs effective regulation. Optimum measures in this direction can be:

• assessment of the level and structure of current assets;
• establishing and monitoring compliance with proportions between long-term and short-term loans, current assets and liabilities;
• optimization of investment in each of the current assets and the structure of liabilities of the balance sheet;
• formation of the optimal ratio of accounts payable and receivable;
• maintaining the liquidity of the company and monitoring cash flows.

Any company must determine for itself the optimal size of the PFC and adjust the value of current assets and liabilities according to it. Only in this way will it be able to maintain its profitability and solvency at the required level.

Questions and answers on the topic

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Equity working capital formula by balance sheet

The concept of net working capital

Current assets can be called assets that can pay off within a year, subject to the successful operation of the company.

Own working capital. Calculation on the example of OJSC "Uralkali"

The company's current assets include:

• short-term accounts receivable;
• cost of stocks and raw materials;
• the amount of VAT on the purchased goods;
• financial and monetary investments.

In order to accurately determine the value of current assets, users need balance sheet data.

Net working capital formula

The formula for a company's net working capital is as follows:

ChKob \u003d OA - KP

Here CHK about - the sum of the net working capital of the enterprise,

OA - the cost of current (current) assets,

KP - the amount of short-term (current) liabilities.

Current assets are included in one of the two sections of the active part of the balance sheet, while the formula for net working capital uses the amount reflected in line 1200 of the balance sheet (total in section II).

Short-term liabilities of the company are obligations with a maturity of one year. These include:

• Various debts (debts to suppliers and buyers, employees for wages, tax service and other government agencies);
• Short-term loans;
• Debt on liabilities with a long-term perspective, including payment of interest on a long-term loan;
• Revenue of the future periods;
• Reserves formed for future expenses.

The balance sheet has a separate section called “Current liabilities”, therefore, in calculating the net capital formula, the total amount for section V (line 1500 of the balance sheet) is used.

The value of the net working capital indicator

The state of net working capital in an enterprise can be assessed according to the following provisions:

1. If the calculation turned out to be a positive value (that is, working capital exceeded liabilities), then we can talk about the stability and solvency of the company. This means that its own working capital will be sufficient for the full implementation of current activities, without attracting borrowed resources.
2. If, as a result of the calculation using the net working capital formula, a negative value is obtained, then we can talk about the financial instability of the company. A situation arises when liabilities exceed working capital, that is, the amount of own working capital is not enough to carry out current activities. This means that there is a need to attract borrowed capital.

In some situations, a too high value of the net working capital indicator indicates that the working capital available to the company is not always used efficiently.

In addition, this excess may characterize a situation where an enterprise uses long-term borrowed funds to finance working capital, which is also considered a negative factor.

Examples of problem solving