Global net working capital (GNWC): what is it and how is it calculated?
Global net working capital, or GNWC for those in the know, is a term that may seem mysterious and enigmatic to those unfamiliar with the arcana of accounting or the subtleties of treasury management. Yet this seemingly abstract concept is of vital importance in the financial management of a company.
But what is this working capital that we sometimes hear about? What is this essential indicator used for, and how does it prove to be a valuable ally in a company's financial health? How do you go about calculating NGRF rigorously, and then interpreting this key figure accurately?
In this article, we will unravel the threads of this accounting enigma and lift the veil on all these mysteries. 🧵
Total net working capital (TNWC): definition
What is NGRF?
Working capital (WC) or total net working capital (TNWC) is a crucial financial indicator that reflects a company's financial strength. It highlights the surplus of sustainable resources available to a company after financing all its stable jobs or stable liabilities.
👉 In other words, the NFR represents a reserve of cash available to the company, a sort of financial cushion intended to cover current expenditure and absorb any unforeseen or unforeseen expenses.
This financial measure actually reveals the gap between :
- the sustainable resources mobilised by the company, such as equity capital and long-term debt,
- and stable jobs, which include fixed assets and other long-term investments.
When sustainable resources exceed stable uses, the company has positive overall net working capital, indicating that it has sufficient liquidity to finance part of its operating cycle.
NWSRF plays a crucial role in a company's financial management, as it provides essential financial flexibility to cope with fluctuations in demand, unforeseen expenses and possible
WCR and NFC: what is the difference with working capital requirements?
Judicious management of total net working capital (TNWC ) and a thorough understanding of working capital requirements (WCR ) are crucial to a company's financial health. These two concepts are inextricably linked, as the NFR has the vital task of financing the WCR, which represents the short-term financing requirements needed to keep day-to-day operations running smoothly.
WCR reflects the difference between :
- current assets (inventories, trade receivables),
- and short-term debts (supplier debts, tax and social security debts).
➕ A positive WCR means that the company must find sources of finance to cover its operating needs. This is where the FRNG comes into play, acting as an indispensable source of funding.
➖ However, if the FRNG is negative, it means that the company does not have sufficient resources to finance its WCR, which can jeopardise its ability to continue operating smoothly and profitably.
Once the WCR is fully financed by the NGBF, any surplus is retained in the form of cash. This cash reserve enables the company to deal with unforeseen circumstances, seize investment opportunities or finance
Working capital: what factors should be taken into account?
Working capital is calculated from the functional balance sheet, either from the top of the balance sheet or from the bottom.
The elements to be taken into account to calculate this are :
- stable jobs: i.e. gross fixed assets (tangible, intangible and financial fixed assets),
- stable resources: i.e. permanent capital and long-term financial debt:
- shareholders' equity or share capital,
- net profit,
- provisions
- depreciation and amortisation
- financial debts.
💡 Tip: to produce your functional balance sheet and obtain all the data you need to calculate WCR, we recommend using specialist software. For example, with Sellsy Facturation & Gestion, you can simplify the monitoring of your accounting entries and control operations. Your various supporting documents are centralised in one place, and access to your chartered accountant makes it easy for him or her to obtain the information needed to draw up the balance sheet.
Why is it important to calculate NGRF?
Overall net working capital enables you to assess the financial health of your business and its long-term viability. It answers the question: "Can assets be financed by long-term stable resources?
Investments must be able to be financed by the company's stable resources. Calculating the NFFR provides this visibility.
How is total net working capital calculated?
Calculating the NFR
As we saw earlier, the calculation of NREF is based on the functional balance sheet.
There are therefore several formulas for calculating overall net working capital:
- from the top of the balance sheet
- from the bottom of the balance sheet.
NREF formula based on the top of the balance sheet
This formula is based on your resources and stable jobs. It is written as follows:
Global net working capital (GNWC) = stable resources - stable jobs
NIF formula from the bottom of the balance sheet
Here you need to calculate net cash, current assets and current liabilities. Here is the formula:
Total net working capital (TNWC) = (current assets + cash assets) - (current liabilities + cash liabilities)
Example of a numerical calculation
Here is a practical example of how this formula works when calculated at the top of the balance sheet:
Analysis and interpretation of NGRF
Positive working capital means that :
- stable resources are greater than stable uses ;
- the company's financial resources cover its investments;
- the surplus enables the WCR to be financed;
- the company is solvent and can pay its debts.
Zero working capital means that :
- stable resources are equal to stable uses ;
- resources barely cover investments;
- there is no surplus: it is impossible to finance WCR.
Negative working capital means that :
- stable resources are less than stable uses;
- the company's financial resources do not cover investments;
- there is no surplus: it is impossible to finance WCR;
- the company is not solvent and cannot pay its debts.
✅ In the event of a zero or negative WCR, consider taking out a bank loan to finance your working capital requirements.
Other related financial ratios NFC
Calculating overall net working capital gives you useful data to help you interpret your balance sheet and keep your finances under control.
Changes in working capital
Using this ratio, you can identify the financial safety margin you have, in terms of the number of days of turnover.
Here's how it's calculated:
Change in working capital = (NGBF X 360)/sales
The working capital ratio
Also known as the current ratio, this is another way of looking at working capital.
It is calculated as follows:
Working capital ratio = current assets/current liabilities
In terms of interpretation, although it all depends on your business and your sector, we can say that a result of less than 1 is a sign of difficulties.
The higher the ratio (ideally over 2), the healthier your business is financially.
Article translated from French