Net working capital is the difference between a company's current assets and its current liabilities. It is another name for working capital, which explains the concept, its drivers and its management in detail. A positive figure means the business has more short-term resources than short-term obligations; a negative figure means it relies on new cash inflows or borrowing to pay its bills.
How the term is used
The word net is added to make clear that liabilities have been subtracted, because some older texts used gross working capital to mean total current assets. In everyday use the two terms are interchangeable. A company with current assets of $900,000 and current liabilities of $600,000 has net working capital of $300,000.
In corporate finance and valuation, analysts often use a narrower operating version that excludes cash and short-term debt, focusing on receivables, inventory and payables. Changes in this figure are subtracted when calculating free cash flow, because money tied up in extra stock or receivables is not available to investors. In mergers and acquisitions, purchase agreements usually set a target level of net working capital, defined in the contract, and adjust the price up or down if the actual amount at closing differs. Analysts also relate it to the cash conversion cycle to see how quickly working capital turns into cash.