How is net working capital calculated?

Net working capital is calculated by taking current assets and subtracting current liabilities. In the context of logistics, transportation, and distribution, current assets typically include inventory and accounts receivable, while current liabilities often include accounts payable.

The formula used to calculate net working capital reflects the need for a business to measure its short-term financial health and operational efficiency. By adding inventory to accounts receivable, you recognize the total resources available that are expected to be converted into cash or used within the business in the near term. Subtracting accounts payable, which represents the short-term obligations to pay suppliers, gives a clear picture of the working capital available after accounting for these obligations.

Thus, this calculation helps businesses evaluate whether they have sufficient assets to cover their short-term liabilities, which is crucial in maintaining smooth operations and ensuring the company can meet its financial commitments as they come due.