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Net Working Capital, sometimes referred as working capital, is defined as Current Assets minus Current Liabilities, is used to determine the availability of a company’s liquid assets by subtracting its current liabilities. Current Assets are the assets that are available within 12 months. Current Liabilities are the liabilities that are due within 12 months. Current assets include stocks, debtors, cash & equivalents and other current assets. Current liabilities include all the short-term borrowings.
The formula for net working capital is:
Net working capital = current assets – current liabilities
Many lending institutions and financing facilities like to use working capital as one of the covenants that need to be maintained. Net working capital is used in various other financial formulas that deal with cash flows. Examples of these formulas include the free cash flow to equity formula and free cash flow to firm formula.
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