Net working capital is the amount of liquid assets a company uses to fund operations and growth, as Accounting Tools reports. The more assets are available, the better the company can finance operations and ongoing growth. If too little money is available, financing of operations may be at risk.Continue Reading
Investors and analysts use net working capital as a measurement to determine how well a company is able to finance ongoing operations and expansion, as Accounting Tools describes. Changes over time in the amount of assets available may indicate a significant change in company strategy or the market and operating environment.
Occasionally, this measurement may be misleading if not interpreted in an appropriate context, as Accounting Tools suggests. One-time events that are costly or result in substantial profit may temporarily change cash reserves. Companies with low net working capital may access a significant line of credit and not need much liquid capital. When using net working capital as a tool, investors should carefully consider what has impacted the amount of liquid capital available to the company. They should use other information, such as accounts receivable data, to interpret net working capital trends, particularly if accounts receivable take a long time to collect.Learn more about Financial Planning