In the economy of any commercial activity, the current profitability of a business is ensured by the work of working capital.
There is a concept of working capital, net working capital and its growth.
What is their meaning and difference?
Working capital - allows you to assess the overall need for what and how much a business needs to earn (short-term assets - excluding fixed assets). For example, the minimum amount of residues of raw materials, goods, accounts receivable, without which it is impossible to ensure production and revenue receipt.
Net working capital allows you to assess the need for your own funds to ensure the smooth operation of the business. For example, if raw materials are purchased with deferred payment, and products are sold in advance, then there will be no need for your own money to ensure the work of the turnover.
The increase in net working capital makes it possible to determine the need for own funds for these purposes in dynamics - from period to period, taking into account the factors that affect it (production volumes, prices, stock norms, etc.).
Net working capital (PSC) represents the difference between current assets and current liabilities of the company, indicating the amount of resources available to finance operating activities after repayment of short-term debts, whereas the increase in net working capital reflects the change in PSC over a certain period, showing the dynamics of the need for working capital, which allows you to analyze the impact of factors such as sales volumes and payment terms, on the liquidity of the business.
A deep and correct understanding of the essence of working capital allows you to effectively manage the economy of an organization, properly plan its short-term assets and the need for money for these purposes.
