What is Net Working Capital (NWC)?
The Short Answer
Net Working Capital (NWC) explained simply
Net Working Capital (NWC) is a key financial metric that shows how much readily available cash a business has to cover its immediate obligations. It is calculated by subtracting current liabilities from current assets. A positive NWC means a business has more short-term assets than liabilities, indicating good short-term financial health. A negative NWC suggests potential liquidity problems, as the business might struggle to pay its short-term debts.
Real-World Example
The Coffee Shop Scenario
Let's say a coffee shop has current assets of $50,000 (cash, inventory, accounts receivable) and current liabilities of $20,000 (accounts payable, short-term loans).
NWC = Current Assets - Current Liabilities NWC = $50,000 - $20,000 = $30,000
This $30,000 NWC means the coffee shop has enough short-term assets to cover its short-term debts, with $30,000 left over for operations.
Why this matters
NWC matters because it tells you if a business can pay its bills in the short term. Buyers look at NWC to make sure the business they are buying is financially stable. It helps them understand if the business has enough cash to keep running without immediate financial trouble.
Always check the NWC when looking at a business. A healthy NWC means the business can handle its day-to-day costs without stress. It’s a good sign of financial stability.
Always check the NWC when looking at a business. A healthy NWC means the business can handle its day-to-day costs without stress. It’s a good sign of financial stability.
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