Updated
Net working capital = current assets − current liabilities
Net working capital measures a business's ability to cover its short-term obligations using assets that will convert to cash within roughly a year. The formula is: Net Working Capital = Current Assets - Current Liabilities, where current assets typically include cash, accounts receivable, and inventory, and current liabilities include accounts payable, short-term debt, and accrued expenses.
Examples use made-up numbers. Education only, not tax, legal or investment advice.
The setup
Illustrative example: a business has $90,000 in current assets (cash, receivables, inventory) and $60,000 in current liabilities (payables, a line of credit balance, accrued payroll).
The math
Net working capital = $90,000 - $60,000 = $30,000, meaning the business has a $30,000 cushion if all current liabilities came due at once.
Owner question to ask: "If every bill I owe in the next 60 days came due tomorrow, could my current assets cover it, and how much of that asset total is actually cash versus money still owed to me?" A business can show positive net working capital on paper while facing a real cash shortage because most of its current assets sit in slow-paying receivables or hard-to-sell inventory.
Unique caveat: net working capital is a snapshot at a single point in time and can swing seasonally for businesses with uneven billing cycles, so a single month's figure should not be treated as representative of year-round liquidity. It also does not account for the quality or age of receivables and inventory — a $20,000 receivable balance that is mostly 90+ days overdue provides far less real liquidity than the same dollar figure in current receivables, even though both are counted identically in the formula. This definition is educational and does not replace advice from a licensed accountant or tax professional familiar with your specific books.
Owners should confirm treatment with their bookkeeper before using this figure in a loan application, valuation, or tax filing. Small differences in chart-of-accounts setup can change how this number is calculated, so consistency period over period matters more than precision in any single month.
Continue with the full explainer lesson.
Definition source
The definition above is based on SEC — Beginners’ Guide to Financial Statements, which describes revenue, cost of sales, gross profit, net income, equity and working capital. Percentages here are arithmetic ratios of those line items, not industry benchmarks.
Questions owners ask
Is net working capital the same as cash?
No. It includes other current assets such as receivables and inventory, and subtracts current liabilities.
What date should I use?
Use assets and liabilities from the same balance-sheet date.
Can positive working capital hide a cash shortfall?
Yes. Customers may pay after bills are due, and inventory may not convert to cash promptly.