why a bank doesn't have working capital? How to calculate net working capital for banks?

Answer 1

an ordinary company's internal business cycle can be thought of as the following:

1. beginning with your cash or credit, make some product [inventory] or prepare to provide some service

2. find customers to buy number 1.

3. ship the product or deliver the service [record revenue], usually with an agreement to be paid later [terms of sale]

4. collect the accounts due, resulting in cash


a bank's business is borrowing and lending money [plus a few odd other related things]. Thus, they don't have much of step 1. They do have step 2. Step 3 is called lending. and step 4 would be receiving the loans back plus interest.

However, banks use much more leverage than ordinary businesses, in part because their fixed assets are small relative to the volume of their 'sales'. [You need a desk to lend money, not a factory.]

So, a bank's financial statements, if you tried to organize them the way an ordinary company's statements are organized, would be all out of proportion. Little plant and equipment. No inventory. Huge accounts receivable but much of it not for years [auto loans, etc.].

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Now, the accepted definition of working capital is all assets likely to 'turn' within one year less all liabilities due within one year.

How can you apply this to banking? Some of the amounts due on a single loan are coming in this year and some aren't. You'd have to divide the accounts of individual borrowers into short term and long term.

Similarly, some deposits will be draw out within one year and some won't. And you don't know which!

Since that was very difficult or impossible even 30 years ago, banks present statements differently. [You can make good estimates these days using computerized methods ... and they are estimates, not an actual counting.]

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So, I conclude that the concept 'net working capital' for a bank does not apply and should not be computed.

Banks have other, more sophisticated reports, which tell their audiences about such aspects of their business as type of borrower, estimated net balance of assets and liabilities subject to interest rate changes within different time periods, etc. These are fairly new and well worth understanding.

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[Disclosure -- at one time, I worked in the planning department of a major banking firm. Comments are from my direct experience.]

Answer 2

Working Capital Calculation For Banks