How to Calculate and Strengthen Net Working Capital
Written By
Lisa Kaup
SVP, Relationship Manager, Middle Market Banking
Working capital is one of the clearest indicators of your business’s financial health. It shows how well you can meet short-term obligations without disrupting your daily operations.
Understanding how to calculate net working capital (NWC) gives growing businesses important insights. It provides visibility into their cash flow, a better understanding of their financial runway and advance warning of potential liquidity crunches.
Knowing the numbers is an important first step, but taking action is what drives results. A relationship banker who understands your cash flow can help identify opportunities, streamline financial strategies and provide customized solutions to strengthen your company’s growth.
How Growing Businesses Can Use Working Capital Insights
Working capital calculations can help guide decision-making for growth-focused businesses. Monitoring liquidity as you scale may help you anticipate potential cash shortages before they disrupt operations.
For middle-market companies, this is especially important. Many face seasonal cash flow fluctuations, rapid growth that outpaces internal liquidity or limited finance teams that need external support to manage complexity. These challenges can make it harder to maintain flexibility and fund expansion without relying too heavily on short-term financing.
Effectively managing receivables and payables is also key to extending your runway. In addition, watching changes in working capital may help you identify when outside financing might be needed to support your expansion goals.
Banking solutions can play an important role in managing working capital, especially for middle-market companies. Lines of credit can provide flexibility when working cash gets tight, giving companies the flexibility to cover short-term gaps or seize growth opportunities. Treasury and cash management services can streamline cash flow by automating receivables and payables, improving visibility, and reducing manual errors. Lockbox services, remote deposit capture and integrated payables platforms can help accelerate collections and optimize disbursements. For companies looking to extend payment timing without straining supplier relationships, purchasing card solutions could offer strategic advantages.
Partnering with a banker who understands these tools — and how they apply to your specific business model — can help you build a more resilient financial foundation and unlock new growth potential.
What Is Net Working Capital?
NWC is the difference between a company’s current assets and current liabilities. It gives you a look into your short-term liquidity. In other words, it tells you how much cash and convertible resources you have available to meet your immediate goals.
The NWC formula is:
Current Assets – Current Liabilities = Net Working Capital.
Step-by-Step: How to Calculate Net Working Capital
Although the calculation of working capital is simple, it requires accurate information. Follow these four steps to measure your working capital and understand what it says about your business.
Step 1: Gather Your Current Assets
Review your financial statements, and create a list of current assets, including:
- Cash
- Accounts receivable
- Inventory
- Short-term investments
Step 2: Gather Your Current Liabilities
Next, list all of the current liabilities, including:
- Accounts payable
- Accrued expenses
- Short-term loans
- Other current obligations
Step 3: Apply the Net Working Capital Formula
Calculate your NWC by subtracting current liabilities from current assets.
Real-World Example:
If your business has $350,000 in current assets and $210,000 in current liabilities, your NWC is:
$350,000 – $210,000 = $140,000
This means you currently have a cushion of $140,000 to cover short-term obligations and keep operations running.
Step 4: Interpret the Result
Generally, a business with a positive NWC has more assets than liabilities. This provides a financial cushion that can fund operations, support growth and help absorb unexpected costs.
A negative NWC indicates that more money is going out in the short term than what’s coming in. Some mature businesses operate this way, turning things around by collecting receivables or quickly turning over inventory. But for most growth-focused companies, it’s a red flag that can limit flexibility and increase reliance on financing.
Understanding Change in Net Working Capital
Working capital calculations are most useful when viewed over time. The change in NWC between two periods (for example, comparing Year 1 to Year 2) often indicates shifts in liquidity, cash flow cycles or how effectively a business is managing growth.
However, the numbers only tell part of the story. The real insights come from understanding what’s driving the change:
- An increase in working capital may indicate the business has more resources available. But it may also be a signal that more cash is tied up in inventory or accounts receivable, which could actually strain liquidity.
- At first, a decrease in working capital may seem to indicate financial problems. But it could also be a result of greater efficiency, such as faster inventory turnover or taking full advantage of suppliers’ payment terms.
Real-World Example:
If your NWC was $90,000 in Year 1 and $130,000 in Year 2, the $40,000 increase may suggest sales growth. But let’s look closer:
- Accounts receivable increased by $50,000 because customers are taking longer to pay.
- Inventory increased by $20,000 as you built up stock.
- Accounts payable increased by $30,000, as you delayed some supplier payments.
The net effect is a $40,000 increase in NWC, but most is tied up in receivables and inventory, meaning these funds aren’t available to invest. This illustrates why it’s so important to dig deeper into each of the formula’s components.
Beyond the Basics: Net Operating Working Capital
The NWC calculation is a good start, but if you want a more precise measure of operational efficiency, net operating working capital (NOWC) is often a better option. This focuses strictly on business operations by removing factors that may distort the picture.
The NOWC formula is:
(Current Assets – Cash) – (Current Liabilities – Short-term Debt) = Net Operating Working Capital
Excluding cash and short-term debt gives you a better view of how efficiently you’re managing the company’s core operations. It shows whether your inventory and receivables are converted into cash quickly enough to cover operating liabilities.
Real-World Example:
If your business has $350,000 in current assets (including $160,000 in cash) and $210,000 in liabilities (including $10,000 in short-term debt), your NOWC is:
($350,000 – $160,000) – ($210,000 – $10,000)
$190,000 – $200,000 = – $10,000
While the previous example showed a positive NWC, this illustrates how NOWC can tell a different story. In this case, the business may not be converting inventory and receivables quickly enough to remain sustainable in the long term.
Tips for Improving Working Capital
For many companies, improving working capital starts with taking better control of the basics. Start with these practical tips:
- Negotiate better terms with suppliers: Extending payment due dates allows you to hold on to cash longer without damaging vendor relationships.
- Improve collections on accounts receivable: Faster invoicing and consistent follow-up can help reduce delays in getting paid.
- Optimize inventory management: Keep inventory levels aligned with demand to prevent tying up cash unnecessarily.
- Leverage banking tools for greater visibility: Integrate cash management solutions with your ERP for a clear, real-time view of your available liquidity.
- Use business credit strategically: The right business credit card can help you manage operational expenses and extend payment timing.
Small shifts can often make a big difference, and improved working capital could give you more flexibility to manage daily operating expenses while funding long-term plans.
Improve Your Growth Potential With Stronger Working Capital
Working capital calculations are a reliable way to measure your company’s short-term financial health and how prepared it is to scale. Regularly tracking changes in NWC may help growth-oriented businesses anticipate liquidity challenges, extend financial runways and confidently pursue expansion opportunities.
A bank that understands your business can help you assess and strengthen your working capital strategy. Let’s talk about how we can help you strengthen your working capital strategy and position your business for scalable growth. Reach out to a Banc of California Relationship Manager to learn more.
Client Spotlight: Pressed Juicery
Want to see how a working capital strategy can fuel real-world growth? Watch how Banc of California partnered with Pressed Juicery to support its national expansion. This case study shows how a tailored banking relationships can help middle-market businesses scale with confidence, from financing new manufacturing capabilities to optimizing cash flow across retail and wholesale channels.
All credit products are subject to credit approval. Not an offer of credit.
CONNECT WITH A RELATIONSHIP MANAGER
COMPLETE THIS FORM OR CALL
877-770-BANC (2262)