Net Working Capital: Formula and Calculation

Net working capital (NWC) is current assets minus current liabilities: the short-term capital a company has tied up in running the business day to day. The formula is NWC = Current Assets - Current Liabilities, though bankers usually strip cash and debt out of it so the number reflects operations rather than financing. Positive NWC means the company can cover its near-term obligations; negative NWC can signal either a cash-efficient machine (think subscription software collecting upfront) or a business that cannot pay its bills. In interviews and models alike, what matters is usually the change in NWC, because that is what moves free cash flow.

TL;DR

• Net working capital = current assets minus current liabilities; the strict version excludes cash and debt.
• Bankers track the change in NWC, not the level: a growing NWC balance consumes cash, a shrinking one releases it.
• The narrow formula used in models is receivables plus inventory minus payables (CFI's most restrictive variant).
• Negative NWC is good for some businesses (collect before paying suppliers) and alarming for others.
• In a DCF, rising revenue almost always drags NWC up with it, which is why FCF includes a minus-change-in-NWC term.

What is net working capital?

Net working capital is the difference between what a company holds in short-term operating assets and what it owes in short-term operating liabilities. It answers a simple question: how much capital is tied up keeping the lights on? Receivables waiting to be collected, inventory sitting in a warehouse, and payables you have not settled yet all live inside NWC. CFI frames it as "the measure of a company's liquidity and its ability to meet short-term obligations, as well as fund operations."

The reason it earns a separate name from plain "working capital" is precision. Working capital loosely means the same subtraction, but in modeling and M&A work, NWC almost always means operating net working capital: cash and short-term debt are excluded because they belong to the financing story, not the operating cycle. That operating version is what feeds a DCF model and what gets pegged in a purchase agreement.

What is the net working capital formula?

There are two formulas in circulation, and which one is "right" depends on the question being asked. CFI lists both:

Broad: $NWC = Current\ Assets - Current\ Liabilities$

Operating (narrow): $NWC = Accounts\ Receivable + Inventory - Accounts\ Payable$

The broad version is the textbook liquidity check: everything convertible to cash within a year, minus everything due within a year. The narrow version drops cash, marketable securities, short-term debt, and the current portion of long-term debt, because none of those are part of the operating cycle. A company can borrow its way to a fat broad NWC while the operating version shrinks, which is why bankers prefer the narrow one for analysis.

How do you calculate net working capital? Worked example

Take a company with receivables of 80 million dollars, inventory of 60 million, cash of 30 million, payables of 45 million, accrued expenses of 15 million, and short-term debt of 20 million.

Broad NWC: current assets are 80 + 60 + 30 = 170; current liabilities are 45 + 15 + 20 = 80; NWC = 90 million dollars.

Operating NWC: strip cash and debt. Operating current assets are 80 + 60 = 140; operating current liabilities are 45 + 15 = 60; NWC = 80 million dollars.

The 10 million dollar gap between the two is exactly cash (30) minus short-term debt (20): financing items that inflate the broad figure but tell you nothing about the operating cycle. If this company's receivables grow faster than its payables next year, operating NWC rises and cash flow falls even if earnings look flat. That is the mechanics interviewers are testing.

How is NWC different from working capital and operating working capital?

The three terms overlap enough that articles and even practitioners use them loosely, but the distinctions matter for interviews:

• Working capital is the loose umbrella term and usually just means the broad subtraction, current assets minus current liabilities.
• Net working capital is the same subtraction stated as a balance-sheet quantity, and in banking usage it usually implies the operating version with cash and debt removed.
• Operating working capital is the strictly operating subset: the version that excludes not just cash and debt but sometimes other non-core items like accrued interest. The full treatment of that distinction lives in operating working capital vs working capital.

When someone asks about NWC in a model or a deal, assume the operating definition unless told otherwise. For how the balance differs from the cash a company actually generates, see working capital vs cash flow.

Is positive or negative net working capital better?

Positive NWC is the safe default: enough short-term assets to cover short-term obligations with room to breathe. Most industrial, manufacturing, and services businesses run positive NWC because they pay suppliers and staff before customers pay them.

Negative NWC gets interesting. A retailer that sells inventory before its payables come due, or a software company collecting annual subscriptions upfront, operates with negative NWC as a feature: customers effectively finance the business. Negative NWC is only a red flag when it reflects an inability to pay obligations rather than a cash-generative model, so read it alongside revenue growth and margins rather than in isolation.

Why does the change in NWC matter more than the level?

Because the level sits on the balance sheet while the change hits the cash flow statement. When NWC rises, with receivables and inventory growing faster than payables, the company is consuming cash to fund growth even though nothing looks wrong on the income statement. When NWC falls, cash gets released back. That is why unlevered free cash flow subtracts the change in NWC: $FCF = EBIT \times (1 - T) + D\&A - CapEx - \Delta NWC$

Forecasting the change is its own discipline: model receivables on days sales outstanding, inventory on days inventory outstanding, and payables on days payable outstanding, then let the deltas fall out. The full method is in how to forecast working capital.

How does net working capital come up in deals and interviews?

In M&A, NWC becomes the "working capital peg": buyer and seller agree a target NWC level at close, and the purchase price adjusts dollar-for-dollar if the delivered balance misses it. Sellers have an incentive to squeeze payables and chase collections right before close to shrink the peg, so buyers diligence the trailing twelve months rather than the latest balance sheet.

In interviews, NWC questions are change questions: "if receivables increase by 50, what happens to cash flow?" (cash falls by 50 via the change in NWC) or "why might a fast-growing company still be cash-constrained?" (NWC growth eats the earnings). Answer the level question in one line, then pivot to the change: that is the part that moves money.

Quick Math

1. Accounts receivable rises $40 million and accounts payable rises $15 million. Inventory is flat. What is the change in net working capital, in millions?

   Change in NWC = change in operating current assets minus change in operating current liabilities.

2. Revenue is $500 million and days sales outstanding is 45 days. Roughly what is the receivables balance, in millions?

   AR = revenue × DSO ÷ 365. 45 days is about an eighth of the year.

3. A company holds $60 million of inventory and turns it 5 times a year. What is COGS, in millions?

   COGS = inventory × inventory turns.

Frequently Asked Questions

What is the net working capital formula?

Net working capital equals current assets minus current liabilities. In modeling practice the operating version excludes cash and short-term debt: receivables plus inventory minus payables is the narrowest common form, per CFI.

Is net working capital the same as working capital?

Practically, yes: NWC is working capital expressed as a netted balance-sheet figure. The usage difference is that "net working capital" usually implies the operating version without cash and debt, while "working capital" alone can mean the broad all-in subtraction.

Can net working capital be negative?

Yes, and it is not automatically bad. Businesses that collect from customers before paying suppliers (retail, subscription software) run negative NWC by design. It is only a warning sign when the company genuinely cannot cover short-term obligations.

Why do you subtract the change in NWC in a DCF?

Because a growing NWC balance consumes cash that never reaches investors. Revenue growth drags receivables and inventory up faster than payables, so the DCF subtracts the increase in NWC from free cash flow; a shrinking NWC adds cash back.

What is a working capital peg in an acquisition?

A working capital peg is the agreed target level of net working capital delivered at closing. If actual NWC lands below the peg, the buyer pays less; above it, the buyer pays more. It exists so the seller cannot strip working capital out of the business before handing it over.

Sources

• Corporate Finance Institute, "Net Working Capital Template": https://corporatefinanceinstitute.com/resources/accounting/net-working-capital/ (checked September 2026)
• Wall Street Prep, "Working Capital": https://www.wallstreetprep.com/knowledge/working-capital/ (checked September 2026)
• Stripe, "Operating Capital vs Working Capital": https://stripe.com/resources/more/operating-capital-vs-working-capital (checked September 2026)