WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Investment Banking Tutorials » Financial Statement Analysis » Changes in Net Working Capital

Changes in Net Working Capital

By Harsh KataraHarsh Katara | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

What are Changes in Net Working Capital?

Change in the net working capital is the change in net working capital of the company from the one accounting period when compared with the other accounting period which is calculated to make sure that the sufficient working capital is maintained by the company in every accounting period so that there should not be any shortage of funds or the funds should not lie idle in future.

Formula

Changes in Net Working Capital = Working Capital (Current Year) – Working Capital (Previous Year)

Or

Change in a Net Working Capital = Change in Current Assets – Change in Current Liabilities.

changes in net working capital

How to Calculate Changes in Net Working Capital? (Step by Step)

  • Step 1 – Find the Current Assets for the current year and previous year.

From the point of the current asset of view, we consider the below:

      • Inventory
      • Accounts Receivable
      • Prepaid Expenses
  • Step 2 – Find the Current Liability for the Current Year and Previous Year

From the current liabilities, we consider the below:

      • Accounts Payable & Accrued Expenses
      • Interest Payable
      • Deferred Revenue
  • Step 3 – Find Working Capital for the Current Year and Previous Year
      • Working Capital (Current Year) = Current Assets (current year) – Current Liabilities (current year)
      • Working Capital (Current Year) = Current Assets (current year) – Current Liabilities (current year)
  • Step 4 – Calculate Changes in Net Working Capital using the formula below –
      • Changes in Net Working Capital Formula = Working Capital (Current Year) – Working Capital (Previous Year);

Change in Net Working Capital Calculation (Colgate)

Below is the Snapshot of Colgate’s 2016 and 2015 balance sheet.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Net Working Capital - colgate

Let us calculate the Working Capital for Colgate.

Working Capital (2016)

  • Current Assets (2016) = 4,338
  • Current Liabilities (2016) = 3,305
  • Working Capital (2016) = 4,338 – 3,305 = $ 1,033 million

Working Capital (2015)

  • Current Assets (2015) = 4,384
  • Current Liabilities (2015) = 3,534
  • Working Capital (2015) = 4,384 – 3,534 = $850 million

Net change in Working Capital = 1033 – 850 = $183 million (cash outflow)

Analysis of the Changes in Net Working Capital

Change in Working capital does mean actual change in value year over year i.e.; it means the change in current assets minus the change in current liabilities. With the change in value, we will be able to understand why the working capital has increased or decreased.

Below are a number of actions that will cause a change in Net Working capital:

  1. If the company does not allow outstanding credit, the account receivables will get reduced. But sales may have a declining effect.
  2. Inventory planning also impacts the change in working capital. An increase in inventory increases the usage of cash.
  3. Stretching accounts payable impacts the change in working capital.
  4. If the growth rate of the company is high, it uses the cash more for buying inventories and increasing account receivables. Cash will be heavily used for it then.

It is an indicator of operating cash flow, and it is recorded on the statement of cash flows. And the cash-flow is one of the important factors to be considered when we value a company. It indicates whether the short-term assets are increasing or decreasing with respect to the short-term liabilities from one year to the next.

Conclusion

If the Net Working capital is increasing, we can conclude that the company’s liquidity is increasing. It could indicate that the company is able to utilize its existing resources in a better way. Some companies have negative working capital, and some companies have positive, as we have seen in the above two examples of Microsoft and Walmart. Generally, companies like Walmart, which have to maintain a large amount of inventory, have negative working capital.

The software companies generally tend to have positive working capital because they do not have to maintain an inventory before they can sell the product. It means that it can generate revenue without increasing current liabilities. Cash flow cannot increase or decrease with an only change in working capital. But if it is not sufficient, the company’s efficiency is greatly reduced.

  • If the current assets and current liabilities have increased by the same amount, there would be no change in net working capital.
  • If the change is positive, then the change in current liabilities has increased more than the current assets.
  • If the change is negative, it means that the change in the current assets has increased more than the current liabilities.

Changes in Net Working Capital Video

Recommended Articles

This has been a guide to Changes in Net Working Capital. Here we discuss this topic in detail, including its meaning, formula, calculation of changes in working capital along with examples. You may also have a look at the related articles:

  • Change in Net Working Capital (NWC) Formula
  • Calculate Net Working Capital
  • Fixed Capital vs. Working Capital Differences
  • Calculate Working Capital Ratio
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Ratio Analysis Course

Step by Step Guide to Calculating Financial Ratios in excel

Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More