Net Working Capital Formula

Net Working Capital Formula (Table of Contents)

Net Working Capital Formula
NWC Calculator
Net Working Capital (NWC) Template

In simple terms, net working capital (NWC) denotes the short terms liquidity of a company. We can calculate NWC simply by adding the current assets and deducting the current liabilities.

Let’s have a look at the formula of net working capital –

Example of Net Working Capital Formula

Let’s take a practical example of net working 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 NWC Formula is –

Total Current Assets – Total Current Liabilities = $110,000 – $50,000 = $60,000.

Net Working Capital Calculation of Colgate

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

Let us calculate Net working Capital 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

Explanation of Net Working Capital Formula

NWC is one of the most popular ratios investors use.

In this formula, there are two important elements.

The first element is the current assets. Current assets are those assets that can be liquidated within one year or less. That means current assets will pay you off for less than a year. We can give examples of current assets as sundry debtors, accounts receivables, inventories, prepaid salaries etc.

The second element is the current liabilities. Current liabilities are those liabilities that can be paid off for less than a year. The examples of current liabilities are sundry creditors, accounts payables, outstanding rent etc.

In this formula, we will calculate the difference between the total current assets and the total current liabilities to calculate NWC.

Use of Net Working Capital (NWC) Formula

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 equity. 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.