Net Working Capital (which is also known as “Working Capital” or the initials “NWC”) is a measurement of the operating liquidity available for a company to use in developing and growing its business. The working capital can be calculated very simply by subtracting a company’s total current liabilities from its total current assets.
Through this formula, a working capital amount can be determined to be either positive or negative. Naturally, this will rely largely on the amount of debt owed by the company. It should not come as a surprise that having plenty of working capital tends to help companies achieve more success. This follows because working capital allows companies to grow smoothly and make necessary improvements to their corporate operations.
On the other hand, companies that are operating with negative working capital may not have the financial support or flexibility to grow and/or improve, even when such developments would be indicated. Hence, working capital can be an indicator of the overall strength of a company.
There are three main indicators used in calculating working capital. Elements of the “current assets” side of the equation will include accounts receivable, as well as any inventory of goods on-hand. “Current liabilities” will include accounts payable.
A positive change in a company’s working capital will generally indicate one of two developments. Either the company has increased its current assets by receiving cash (or some other form of assets), or it has minimized its liabilities – often by paying off a short-term creditor.