A firm's net working capital reflects the amount of funds required to support its day-to-day routine operations. The word net reflects the fact that the requirement is net of spontaneous financing.

Question

Quizplus · Accepted Answer

Net working capital is calculated by subtracting the current liabilities from the current assets. Spontaneous financing refers to funds generated by the firm's normal operations, such as trade credit from suppliers or an increase in accounts payable. Therefore, the net working capital requirement is calculated after accounting for spontaneous financing.

A Firm's Net Working Capital Reflects the Amount of Funds