Net working capital formula: how to calculate it and what it tells you

Current assets are cash and things you expect to turn into cash within about a year, such as customer invoices you have not collected and inventory.

Current liabilities are bills due within about a year, such as supplier invoices, accrued payroll and the part of a credit line due soon.

The setup

• Cash: $40,000.00
• Customer invoices owed to you: $95,000.00
• Inventory: $45,000.00
• Supplier invoices: $70,000.00
• Accrued payroll and taxes: $20,000.00
• Credit line due within a year: $30,000.00

The math

1. Current assets = $40,000.00 + $95,000.00 + $45,000.00 = $180,000.00.
2. Current liabilities = $70,000.00 + $20,000.00 + $30,000.00 = $120,000.00.
3. Net working capital = $180,000.00 − $120,000.00 = $60,000.00.
4. Current ratio = current assets divided by current liabilities = $180,000.00 divided by $120,000.00 = 1.50.

A positive number means short-term resources exceed short-term bills on paper. It does not mean cash is available today.

In the example only $40,000.00 is cash; $140,000.00 is invoices and inventory that still have to convert. That gap is why owners with positive working capital can still run short of cash in a given week.

• Invoices owed to you that are slow to collect.
• Inventory that sits.
• Bills due before customers pay.

A 13-week cash forecast shows when those timing gaps land.