Net Working Capital Calculator
Analyze your business liquidity and operational efficiency
Current Assets
Current Liabilities
What is Net Working Capital?
Net Working Capital (NWC) is a financial metric that represents the difference between a company's current assets and its current liabilities. It is a critical measure of a company's short-term liquidity, operational efficiency, and overall financial health. Essentially, it tells you if a business has enough liquid assets to cover its upcoming debts and expenses within the next 12 months.
The Net Working Capital Formula
The standard formula to calculate Net Working Capital is:
Net Working Capital = Total Current Assets – Total Current Liabilities
Key Components of the Calculation
- Current Assets: These are assets that can be converted into cash within one year. This includes cash, accounts receivable (money owed by customers), and inventory.
- Current Liabilities: These are financial obligations due within one year. Common examples include accounts payable (money owed to suppliers), accrued expenses (like wages or taxes), and short-term debt repayments.
How to Interpret Your Results
Positive Working Capital: This indicates that the company can pay off its short-term liabilities with its current assets. It suggests financial stability and the potential for growth and investment.
Negative Working Capital: If liabilities exceed assets, the business may struggle to pay back its creditors or may even face bankruptcy if it cannot generate more cash quickly. However, some companies with high inventory turnover (like grocery stores) can operate successfully with negative NWC.
Practical Example
Imagine a small retail store with the following balances:
- Cash: $10,000
- Accounts Receivable: $5,000
- Inventory: $15,000
- Accounts Payable: $8,000
- Short-term Debt: $4,000
Calculation:
Total Current Assets = $10,000 + $5,000 + $15,000 = $30,000
Total Current Liabilities = $8,000 + $4,000 = $12,000
Net Working Capital = $30,000 – $12,000 = $18,000
In this case, the business has a healthy surplus of $18,000 to fund its daily operations.