Net working capital

Definition

Net working capital (NWC) is the difference between a company's current assets and current liabilities. It measures a company's short-term liquidity and operational efficiency.

5 Must Know Facts For Your Next Test

1. Net working capital is calculated as Current Assets - Current Liabilities.
2. A positive NWC indicates that a company can cover its short-term liabilities with its short-term assets.
3. NWC is crucial for day-to-day operations and smooth business functioning.
4. Trade credit terms can significantly impact a company's net working capital.
5. Effective management of NWC involves balancing inventory, accounts receivable, and accounts payable.

Review Questions

• What is the formula to calculate net working capital?
• Why is positive net working capital important for a business?
• How does trade credit affect net working capital?

Related terms

Current Assets: Assets expected to be converted into cash within one year.

Current Liabilities: Obligations due within one year.

Liquidity: The ability of a company to meet its short-term financial obligations.