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Net working capital definition
Net working capital is the difference between a company's current assets and its current liabilities. It measures the short-term resources a business has left to fund day-to-day operations.
Current assets include cash, accounts receivable, inventory, and anything else expected to turn into cash within a year. Current liabilities include accounts payable, short-term debt, and taxes due within a year. Subtracting the second from the first shows whether the company can cover its near-term obligations.
Net working capital differs from the current ratio, which compares the same two figures as a division (current assets divided by current liabilities) rather than a subtraction. Positive net working capital usually signals more short-term assets than obligations; a negative figure can signal liquidity pressure, though the right level varies by industry.
Net working capital Example
A company holds USD 500,000 in current assets and owes USD 350,000 in current liabilities. Net working capital is:
USD 500,000 - USD 350,000 = USD 150,000
The company has USD 150,000 in net working capital, so it holds more short-term assets than short-term obligations.
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