**Formula of Change in Net Working Capital (Table of Contents)**

## What is Change in Net Working Capital Formula?

Net working capital is used for liquidity calculation which will measure an organization’s ability to clear off its current liabilities (those liabilities that are due within a year) with current assets ( those assets which will be converted into cash within a year). The net working capital formula focus upon liabilities such as accounts payable, trade debts, and notes that should be repaid in the current reporting year.

Change in NWC Formula is represented as below-

**Changes in Net Working Capital Formula = Working Capital of Current Year – Working Capital of Previous Year**

### Explanation of the Change in NWC Formula

The equation for the calculation of the change in net working capital can be calculated and explained in the following steps.

**Step 1:** First of all, find out the Current Assets for both years i.e. the previous year and current year

**Step 2:** Find out the Current Liabilities for both years i.e. again the previous year and current year

**Step 3:** The find out the Working Capital for the Previous Year and Current Year.

**Step 4:** Using the formula discussed earlier now finally you can calculate the changes in Net Working Capital.

Hence one can notice that the formula tries to come up with a potential asset in hand which can be used to pay off the short-term debt.

### Change in NWC Formula Examples (with Excel Template)

Let’s see some simple to advanced examples of change in a net working capital equation to understand it better.

#### Example #1

**Vista ltd wants to check how its liquidity has changed in one year. Sam who is the CFO of the company suggested calculating a change in net working capital ratio. After looking at Vista Ltd. balance sheet, Sam noticed that its Current assets were 120,000 and 150,000 for the year ended 2017 and 2018 respectively and its liabilities due within reporting financial year: Trade debts were 30,000 and 25,000, accounts payable were 45,000 and 65000 for the year 2017 and 2018 respectively.**

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You are required to calculate the change in net working capital.

**Solution:**

We are given information on current assets; however, first, we need to calculate current liabilities which would be nothing but a summation of Trade debts and accounts payable as calculated below.

Then working capital is nothing but the difference between current assets and current liabilities.

Calculation of NWC will be as follows-

- Net Working Capital For 2017 = 1,20,000 – 75,000 =45,000
- Net Working Capital For 2018 = 1,50,000 – 90,000 =60,000

Therefore the calculation of Change in a Net working capital equation can be done as follows,

- Changes in Working Capital Formula = 60,000 – 45,000

**Change in NWC will be –**

- Changes in Working Capital = 15,000

#### Example #2

Below is the extract of a balance sheet from RBL bank ltd for two financial years. All the below figures are in crores.

You are required to calculate Change in Net working capital.

**Solution:**

We are given information on current assets as well as current liabilities.

Then working capital is nothing but the difference between current assets and current liabilities.

Calculation of Working Capital will be as follows-

Net Working Capital For MAR -17 = 34948.3 – 1786.26 =33,162.04

Net Working Capital For MAR -18 = 46075.47 – 2010.24 =44,065

Therefore the calculation of Change in a Net working capital formula can be done as follows,

- Changes in Working Capital Formula = 44,065.23 – 33,162.04

**Change in NWC will be –**

- Changes in Working Capital = 10,903.19

#### Example #3

Below is the extract from Federal bank ltd for two financial years. All the below figures are in crores.

You are required to calculate Change in Net working capital.

**Solution:**

We are not given information on current assets neither on current liabilities directly; however, we need to calculate first them which would be nothing but a summation of Cash and Bank and Receivables for current assets, Short term loans and accounts payable for current liabilities as calculated below.

Then working capital is nothing but the difference between current assets and current liabilities.

Calculation of Working Capital will be as follows-

Working Capital For Mar-17 = 86523.36 – 2709.66 = 83813.70

Working Capital For Mar-18 = 107294.70 – 2801.92 =104492.778

Therefore, the calculation of Change in a Net working capital formula can be done as follows,

- Changes in Working Capital Formula = 104,492.78 – 83,813.70

**Change in Working capital will be –**

- Changes in Net Working Capital = 20,679.08

### Relevance and Use of Change in Net Working Capital Formula

Change in Working capital would mean that the actual change in amount or the value year over year i.e. it means the change in current assets and then deducting the change in current liabilities from it. With this change in amount or the value, one should be able to understand the reasons behind as to why the working capital has decreased or increased.

** **The change in working capital will majorly indicate whether the short-term assets of the company are decreasing or increasing when compared with the short-term liabilities on a year on year basis. If it’s increasing then one can conclude that the liquidity is increasing.

Below are three conclusions one can make:

- If the current assets and current liabilities both have increased by a similar amount, then there is no change in the net working capital.
- If the change is positive, then the change in current liabilities would have increased more than the change in current assets.
- If the change is negative, then it would mean that the change in the current assets has increased more than the change in current liabilities.

### Recommended Articles

This has been a guide to Change in Net Working Capital Formula. Here we discuss how to calculate Change in Working Capital using its formula along with examples and downloadable excel template. You can learn more about financial analysis from the following articles –

- 10 Types of Financial Analysis
- Financial Analysis | Limitations
- Tools of Financial Analysis
- 12 Steps included in Accounts Payable Cycle
- Explanation of Accounts Payable Examples
- Working Capital Turnover Ratio Calculation
- Working Capital Ratio Calculation
- Current Assets vs Non-Current Assets – Compare
- Fixed Capital vs Working Capital – Compare

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