Definition
Net working capital is current assets minus current liabilities. It shows short-term funding tied to operations.
Formula
Net working capital = current assets - current liabilities
Example
CA $900k and CL $650k gives NWC of $250k.
How to use it
- Rising NWC often means cash is tied up in receivables or inventory.
- Use NWC changes to explain gaps between profit and cash.
- Separate operating NWC from excess cash to avoid double counting liquidity.
- Track NWC days (DSO, DIO, DPO) to see which lever drives changes.
Common mistakes
- Including cash in NWC when analyzing operating working capital.
- Ignoring seasonality that can distort one-month snapshots.
- Comparing NWC across periods without accounting for growth or mix shifts.
Measured as
Net working capital = current assets - current liabilities
Misused when
- Including cash in NWC when analyzing operating working capital.
- Ignoring seasonality that can distort one-month snapshots.
- Comparing NWC across periods without accounting for growth or mix shifts.
Operator takeaway
- Rising NWC often means cash is tied up in receivables or inventory.
- Use NWC changes to explain gaps between profit and cash.
- Separate operating NWC from excess cash to avoid double counting liquidity.
- Tie Net Working Capital to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Cash conversion cycle: turn working capital into runway if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Net Working Capital belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Cash conversion cycle: turn working capital into runway: A practical guide to the cash conversion cycle (CCC): how AR/AP timing changes cash, how to reduce days outstanding, and why runway depends on working capital.