Global net working capital (GNWC): what is it, how do you calculate it?

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 intricacies of cash management. Yet this seemingly abstract concept is of vital importance to the financial management of a company.

But what is this working capital we sometimes hear so much about? What is this essential indicator used for, and how does it prove to be a valuable ally in a company's financial health? And how do you go about calculating NGRF rigorously, and then interpreting this key figure accurately?

In this article, we'll untangle the threads of this accounting enigma and lift the veil on all these mysteries. 🧵

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Global net working capital (GNWC): definition

What is GNCR?

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 FRNG represents a cash reserve available to the company, a sort of financial cushion designed to cover current expenses and absorb any contingencies or unforeseen expenses.

This financial measure actually reveals the gap between :

• sustainable resources mobilized by the company, such as shareholders' equity 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 potential

BFR and FRNG: what's the difference with working capital requirements?

Sound 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 notions are inextricably linked, since the vital mission of the NGNWF is to finance 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 debts).

➕ A positive WCR means that the company must find sources of financing to cover its operating needs. This is where the FRNG comes into play, acting as an indispensable source of financing.

➖ However, if the FRNG is negative, it means that the company does not have sufficient resources to finance its WCR, which may jeopardize its ability to continue operating smoothly and profitably.

Once the WCR has been fully financed by the NGBF, any surplus is retained in the form of cash. This cash reserve enables the company to deal with unforeseen events, 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 or the bottom.

The elements to be taken into account in calculating it are :

• stable jobs: i.e. gross fixed assets (tangible, intangible and financial fixed assets),
• stable resources: i.e. permanent capital and long-term financial debts:
  • shareholders' equity or share capital,
  • net income,
  • provisions,
  • depreciation and amortization,
  • financial debts.

💡 Tip: to create your functional balance sheet and obtain all the data needed to calculate WCR, we recommend using specialized software. With Sellsy Facturation & Gestion, for example, you can simplify the monitoring of your accounting entries and control operations. Your various supporting documents are centralized in one place, and access to your chartered accountant makes it easy for him to obtain the information he needs to draw up your balance sheet.

Why is it important to calculate net working capital?

Overall net working capital enables you to assess your company's financial health and sustainability. 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 FRNG provides this visibility.

How do you calculate total net working capital?

Calculating net working capital

As we have already seen, the calculation of net working capital is based on the functional balance sheet.

There are several formulas for calculating overall net working capital:

• from the top of the balance sheet,
• from the bottom of the balance sheet.

Net working capital from 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 uses

NSFR formula from the bottom of the balance sheet

Here, you need to calculate net cash, current assets and current liabilities. Here's the formula:

Global net working capital (GNWC) = (current assets + cash assets) - (current liabilities + cash liabilities)

Example of a numerical calculation

Here's a concrete example of how this formula works when calculated from the top of the balance sheet:

Analysis and interpretation of FRNG

Positive working capital means that :

• stable resources exceed stable uses ;
• the company's financial resources cover investments;
• the surplus is sufficient to finance WCR;
• 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: working capital cannot be financed.

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: working capital cannot be financed;
• the company is not solvent and cannot pay its debts.

✅ In the event of zero or negative WCR, consider a bank loan to finance your working capital requirements.

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Other related financial ratios

Calculating overall net working capital provides you with useful data to help you interpret your balance sheet and keep your finances under control.

Changes in working capital

With this ratio, you identify, in number of days of sales, the financial safety margin you have.

Here's how to calculate it:

Change in working capital = (FRNG 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 activity and sector, we can say that a result below 1 is a sign of difficulties.

The higher the ratio (ideally over 2), the healthier your company's financial situation .