What is the meaning of net working capital?

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Net working capital (NWC) is the difference between a business’ short-term assets and its short-term debts and liabilities. It is ideal to have a positive net working capital, as this signifies that the company’s financial obligations are met, and it can invest in other operational requirements.

Net working capital = current assets (less cash) – current liabilities (less debt)

Here, current assets (CA) = The sum of all short-term assets that are easily convertible into cash like accounts receivable, debts owed to the company, etc. It also includes available cash.

Current liabilities (CL) = The sum of short-term liabilities that need to be paid off within the company’s operating cycle or a year.

A difference between the two thus presents the company’s liquidity, stating whether it holds sufficient assets to meet short-term liabilities.

For example, a company has the following CAs and CLs in its balance sheet.

  • Inventories – Rs. 40,000
  • Accounts receivables – Rs. 50,000
  • Cash – Rs. 10,000
  • Debtors – Rs. 5,000
  • Creditors – Rs. 10,000
  • Short-term loans – Rs. 30,000
  • Income Tax – Rs. 5,000

In this case, NWC will be calculated as follows:


= (Inventories + accounts receivables + Debtors – cash) – (Short-term loans + Income Tax – Creditors)

= (40,000 + 50,000 + 5,000 – 10,000) – (30,000 + 5,000 – 10,000)

= 85,000 – 25,000

= Rs. 60,000

The company thus has a net working capital of Rs. 60,000, an amount that it can use for its short-term obligations.

In case of working capital deficits, you can avail additional funds to meet your liquidity requirement. Bajaj Finserv eases this concern with its high-value working capital loan, which is available against minimum eligibility.

Additional Read: Importance of capital budgeting

Components of working capital

Currently owned assets:

Current assets are monetary gains that a business has on hand, or expects to get in the next year:

  • Cash and its equivalents: All the money that the business has on hand. This includes foreign cash and certain types of investments, like money market accounts
  • Inventory: This includes everything from raw materials to unsold finished products
  • Accounts receivable: This is a list of all cash claims for goods sold on credit
  • Notes receivable: All claims to payment for other deals, made in writing

Current liabilities:

Current liabilities are all the debts that a company owes or is likely to owe in the next 12 months. Working capital helps figure out if a company can pay off all its bills with short-term assets it already has.

  • Accounts payable: All unpaid bills to vendors for supplies, raw materials, utilities, property taxes, rent, or any other third-party running costs
  • Payroll: All the staff's unpaid pay and salaries. Depending on when the company pays its employees (if they only get one paycheque a month), this may only add up to one month's worth of wages
  • Long-term debts: All current payments on long-term debt
  • Tax owed: These could be tax payments that are not due for a few months. But most of the time, these accruals are short term (due within the next 12 months)
  • Dividend payable: All payments to owners that the board approves. A company can decide not to pay dividends in the future, but it must keep paying dividends that are already due
  • Unearned revenue: Any money that comes in before the completion of work. If the company does not finish the job, the client may have to give back the money

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