What Is Net Working Capital (NWC)?
Net Working Capital (NWC) is the difference between a company’s current assets and current liabilities. It is calculated by adding together cash, inventory (including finished goods), and money owed to the business, then subtracting unpaid debts and current expenses.
The result shows how much short-term financial flexibility a business has to operate smoothly.
Why Net Working Capital Matters
NWC is a strong indicator of a company’s financial health, liquidity, and operational efficiency. A business with positive NWC has enough resources to manage daily operations and invest in growth opportunities.
When liabilities exceed assets, the company faces financial risk and may struggle to meet its obligations. This situation is known as negative NWC, which occurs when the ratio of assets to liabilities falls below one.
Understanding Positive vs. Negative NWC
A positive NWC means a company can comfortably support its current operations while planning for expansion. However, an excessively high NWC is not always ideal—it may indicate poor use of capital, such as overstocking inventory or failing to reinvest profits efficiently.
On the other hand, low or negative NWC may signal financial distress. The healthiest position is when NWC aligns with or slightly exceeds the industry average.
What “Current” Assets and Liabilities Mean
In financial terms, “current” refers to items expected to be settled within 12 months.
Current assets include:
1. Cash
2. Accounts receivable
3. Inventory
4. Other short-term reserves
Current liabilities include:
1. Accounts payable
2. Wages
3. Taxes
4. The current portion of long-term debt
All of these figures appear on a company’s balance sheet.
Factors That Affect Net Working Capital
Several factors can influence NWC, including:
1. New projects or investments that temporarily reduce cash flow
2. Customers are delaying invoice payments
3. High operational expenses
Improving collections, negotiating better supplier terms, or optimizing inventory levels can help strengthen NWC. While delaying debt payments may conserve cash short term, it is generally not a recommended strategy.
Maintaining the Right Balance
Net Working Capital keeps a business financially disciplined and solvent. Investing all profits at once can leave a company vulnerable to unexpected expenses, while failing to reinvest enough can stall growth.
NWC provides insight into how cash flows through the business, helping owners strike the right balance between stability and expansion—keeping operations healthy and the business profitable.
