Net Working Capital

Net Working Capital Definition

In simple terms, net working capital (NWC) denotes the short terms liquidity of a company and is calculated as the difference between the total current assets and the total current liabilities

Net Working Capital Formula

Let’s have a look at the formula –

Net Working Capital

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Source: Net Working Capital (wallstreetmojo.com)

There are two important elements.

Example

Let’s take a practical example of networking capital formula.

Tully Company has the following information –

  • Sundry Creditors – $45,000
  • Sundry Debtors – $55,000
  • Inventories – $40,000
  • Prepaid salaries – $15,000
  • Outstanding advertisements – $5000

Find out the NWC of Tully Company.

In the above example, we have been given both current assets and current liabilities.

First, we need to separate the current assets from the current liabilities.

Then we need to total the current assets and also the current liabilities. And then, we need to find the difference between the current assets and the current liabilities.

  • Current Assets – Sundry Debtors, Inventories, Prepaid salaries;
  • Current Liabilities – Sundry Creditors, Outstanding advertisements.

Total current assets = (Sundry Debtors + Inventories + Prepaid salaries) = ($55,000 + $40,000 – $15,000) = $110,000.

Total current liabilities = (Sundry Creditors + Outstanding advertisements) = ($45,000 + $5000) = $50,000.

The Net Working Capital Formula is –

Colgate Example

Below is the Balance Sheet Snapshot of Colgate’s 2016 and 2015 financials.

Net Working Capital - colgate

Let us do the Calculation for Colgate

NWC (2016)

  • Current Assets (2016) = 4,338
  • Current Liabilities (2016) = 3,305
  • NWC (2016) = 4,338 – 3,305 = $ 1,033 million

NWC (2015)

  • Current Assets (2015) = 4,384
  • Current Liabilities (2015) = 3,534
  • NWC (2015) = 4,384 – 3,534 = $850 million

Use of Net Working Capital

If you look at current assets and current liabilities, you will find them on the balance sheet. Investors use NWC to know whether a company is liquid enough to pay off its short-term liabilities. That’s why NWC needs to be interpreted properly.

There are two ways through which we can interpret NWC.

  • When the NWC is positive, the investors can understand that the company has enough current assets to pay off its current liabilities.
  • And when the NWC is negative, the investors can comprehend that the company doesn’t have enough assets to pay off its current liabilities.

Investors can also see the usefulness of NWC in calculating the free cash flow to firm and free cash flow to equityFree Cash Flow To EquityFCFE (Free Cash Flow to Equity) determines the remaining cash with the company's investors or equity shareholders after extending funds for debt repayment, interest payment and reinvestment. It is an indicator of the company's equity capital managementread more. But if there is an increase in the NWC, it isn’t considered as positive; rather, it’s called negative cash flow. And obviously, this increased working capital is not available for equity.

Net Working Capital Calculator

You can use the following calculator

Total Current Assets
Total Current Liabilities
Net Working Capital Formula
 

Net Working Capital Formula = Total Current Assets Total Current Liabilities
0 0 = 0

Net Working Capital Formula in Excel (with excel template)

Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Total Current Assets and Total Current Liabilities.

You can easily do the Calculation in the template provided.

First, we need to separate the current assets from the current liabilities.

Net Working Capital formula in excel

You can download this template here – Net Working Capital Excel Template.

Net Working Capital Video

 

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This article has been a guide to Networking Capital Formula, examples along with practical illustrations. Here you also find Net Working Capital Calculator along with an excel template download.  You may also have a look at the following articles to learn more about Financial Ratio Analysis –