Change in Working Capital

Running a business comes with its share of financial responsibilities. Accounting is all about keeping track of every dollar and every last penny. A business without good accounting professionals is bound to fail. Just like a car needs its own engine control unit for monitoring its functioning, a company needs its accounting department. There are various financial constructs and calculations, which are used in accounting to analyze the performance of a company. One of the most important ones is the net working capital of the company. It is closely related to the degree of liquidity that is available to a company for day-to-day operations.

Definition

As the name itself suggests, working capital is the cash available for the daily operations of the company. Its net value can be defined as the difference between total current assets of the company and its current liabilities. The current assets of the company include its inventory and accounts receivable, while the liabilities include the accounts payable. Securities and investments are also included in current assets, while current liabilities may also include debt. Thus the formula for calculating is as follows:

Net Working Capital (WC) = Current Assets - Current Liabilities

When there is a change in capital value, either there has been a spurt in the accounts receivable or there is a decrease in the number of liabilities. Analyzing the reason for change will require that you investigate the change in current assets and the amount of liabilities. If you want to look at cash flow, the operating working capital is a better choice as it only monitors the accounts receivable and accounts payable.

How to Calculate Change?

To calculate the change in two successive years, you need to calculate the net operating working capital, for both years and simply subtract the second year's value from the first year's amount. For successive years, you must run the same calculation.

The difference will demonstrate the changes in cash flow, besides highlighting macroscopic changes in the fortunes of the company. For example, consider that the working capital for year 2009 of a certain company is $90,000, while the successive year sees, it rising to $120,000. Then the change in cash flow will obviously be $30,000, which is good news for the company.

The total change in net working capital over a few years can reveal the progress made by the company in revenues, as more cash becomes available for its operations. A positive change is an important indicator of its overall progress, while a negative change indicates a drop in sales. When comparing the balance sheets of successive years for a company, one needs to monitor this net change.