Feb 09 2012 06:04 PM
Lets ignore the formula for now. Lets understand the concept first -
For a company to run smoothly you need cash to pay for everyday expenses like travel, rent, bills, salaries etc. This cash you need to run your business smoothly day to day is called Working Capital.
Either this cash should be readily available or some of the companys assets should be readily convertible to cash (current assets) - either by selling the asset or by collecting payment dues. If a company does not have sufficient working capital, then its operations will slow down.
So all the expenses like bills payable, salaries payable, interest payable etc are current or short-term liabilities and cash is a short term asset. The short -term asset (cash) is needed to finance the short-term liabilities. Hence Net Working Capital = Short term Assets - Short Term Liabilities.
Is this clear ? Please let me know if its not.