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.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Net Working Capital" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Cash conversion cycle: turn working capital into runway) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- IRR Calculator: Estimate internal rate of return (IRR) for an investment using yearly cash flows.
- Discounted Payback Period Calculator: Estimate discounted payback period using a discount rate (and compare to simple payback).
- Cash Runway Calculator: Estimate runway from cash balance, revenue, gross margin, and operating expenses (optionally with revenue growth).
- Break-even Pricing Calculator: Compute contribution margin, break-even units, and profit at a given volume based on price and variable costs.
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
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.