Working Capital (Net Working Capital)

Definition

Working capital, or net working capital (NWC), is the difference between a company’s current assets and its current liabilities. It measures short-term liquidity — a company's ability to fund operations and meet near-term obligations.

Why it matters

  • Indicates short-term financial health and operational efficiency.
  • Helps assess whether a company can pay employees, suppliers, and other bills without raising new capital.
  • Guides decisions about investing, borrowing, and managing inventory and receivables.

Formula

Working capital = Current assets − Current liabilities

Expressed as a dollar amount. Positive working capital means current assets exceed near-term obligations; negative working capital means liabilities exceed assets.

Components

Current assets

Assets expected to convert to cash within 12 months, typically including:
Cash and cash equivalents
 Short-term investments
Accounts receivable (net of allowances)
 Inventory (raw materials, WIP, finished goods)
Prepaid expenses
 Other short-term assets (e.g., short-term deferred tax assets)

Current liabilities

Obligations due within 12 months, typically including:
Accounts payable
 Wages and accrued payroll
Current portion of long-term debt
 Accrued taxes
Dividends payable (authorized)
 Unearned (deferred) revenue
* Other short-term liabilities

Positive vs. Negative Working Capital

  • Positive working capital: indicates the company likely has the resources to cover short-term debts and can support operations or invest in growth.
  • Negative working capital: suggests potential liquidity stress and difficulty meeting obligations. In some business models (e.g., fast-turnover retail with supplier financing), short-term negative working capital can be sustainable, but prolonged negative NWC is risky.

Limitations

Working capital is useful but has caveats:
Snapshot in time: balances change constantly, so the metric can be outdated quickly.
 Composition matters: a high NWC driven mainly by receivables or obsolete inventory may not be truly liquid.
Asset devaluation: receivables can become uncollectible and inventory can become obsolete or lose value.
 Hidden or unrecorded obligations can distort the calculation.

Special considerations

  • Needs vary by industry: manufacturing and long-cycle businesses typically require higher working capital than daily retail operations.
  • High working capital isn’t always positive — it can signal excess inventory, idle cash, or missed financing opportunities.
  • Forecasting working capital involves projecting sales, production, collections, and payables to anticipate cash needs.
  • The current ratio (current assets ÷ current liabilities) complements NWC by showing the relationship as a ratio rather than a dollar amount.

How companies can improve working capital

  • Accelerate collections (shorten receivable terms, incentivize early payment).
  • Manage inventory more efficiently (just-in-time, better forecasting).
  • Negotiate extended payment terms with suppliers.
  • Convert short-term assets into cash or avoid unnecessary prepayments.
  • Refinance or restructure short-term debt into longer maturities.

Example

A company reports $147 billion in current assets and $118.5 billion in current liabilities. Its working capital is:
$147B − $118.5B = $28.5B
This indicates roughly $28.5 billion in short-term resources available after covering current obligations.

Explain Like I'm Five

Working capital is the money a business has left after setting aside what it must pay soon. If a company can easily turn what it owns into cash to pay bills due this year, it has healthy working capital.

Short FAQs

  • How is working capital different from profit?
    Working capital measures short-term liquidity (assets vs. liabilities due within a year); profit reflects earnings over a period after revenues and expenses.

  • Is higher working capital always better?
    No. Excessive working capital can mean idle cash or excess inventory that could be invested more productively.

  • Can negative working capital be okay?
    Sometimes, if the business model generates quick cash (e.g., customers pay immediately while suppliers are paid later). Persistent negative NWC, however, is a warning sign.

Bottom line

Working capital is a fundamental measure of a company's short-term liquidity and operational health. It’s most useful when examined alongside the composition of assets and liabilities, industry norms, and trends over time.