Net Current Assets, also known as the Working Capital, is an essential financial metric calculated by simply subtracting a company’s Current Liabilities from their Current Assets. The Net Current Asset is used to give business owners, investors, analysts, and lenders a pulse to quickly evaluate a company’s financial health. It shows how much a company can cover their debts and liabilities for the year.
What is Net Current Assets?
If the Current Assets are greater than the Current Liabilities (Positive Net Current Asset), they have enough assets to pay their financial obligations. It also shows that a company is operating efficiently and can invest and grow without borrowing.
However, suppose a company’s Current Liabilities are greater than their Current Assets (Negative Current Assets). In that case, this means that a company is in financial difficulty and has a small chance of meeting its financial obligations.
Why Net Current Asset Is Important?
One of the main reasons for a business’s failure is insufficient capital. This is why calculating a company’s Net Current Assets is important because this indicator helps the owner spot business risks and evaluate whether their company is in good or poor financial health. When a business owner sees the outline of a company’s assets and liabilities, they will also see which investments and loans may or may not help them pay bills, debts, and other financial emergencies when the need arises.
Simply put, the higher a company’s Net Current Asset is, the more Working Capital they have and the more liquid a company is in the short term.
How to Calculate Net Current Assets?
We may simply use this formula to calculate a company’s Net Current Asset:
Net Current Assets = Current Assets – Current Liabilities
Current Assets consist of assets that can be easily and quickly converted to cash, which includes cash, cash equivalents, inventory, prepaid expenses, accounts receivables, and marketable securities.
Meanwhile, Current Liabilities consist of a company’s financial obligations due within the year. They include short-term debt, accounts payable, dividends payable, loan interests, wages, and taxes due within that calculation period.
For example, a food company needs to calculate their Net Current Asset for 2019 from this record. Subtracting their Current Liabilities of £65,000.00 from their Current Assets £185,000.00, the company’s Net Current Asset amounts to £120,000.00. This shows that the food company is in good financial health.
|Cash & Cash Equivalents||£100,000.00||Taxes Payable||£40,000.00|
|Accounts Receivables||£50,000.00||Interest Payable||£5,000.00|
|Marketable Securities||£35,000.00||Short-term Debts||£20,000.00|
|Current Assets||£185,000.00||Current Liabilities||£65,000.00|
|Net Current Asset||£120,000.00|
A company’s Net Current Assets is just one of the many financial indicators used to determine a company’s financial health. When a company is in good financial health, the Net Current Asset results in a positive number. However, when the Net Current Asset is negative, a company faces financial problems as its Current Assets cannot cover its Current Liabilities. A company’s goal should be that they have more in their Current Assets enough to cover their Current Liabilities.
An accounting firm is a good resource for managing your finances. Annette Ferguson – Chartered Accountant and Certified Profit First Professional – can help you unlock financial strategies to improve the profitability of your business amidst an economic crisis. Book a call with us.