Net Working Capital

What is a Net Working Capital?

Net working capital is the amount of funding needed by a business to finance its day to day trading operations, and for that reason is sometimes referred to as net operating working capital.

As a business grows, an increase in working capital needed results in additional requirements for funding as more and more cash is tied up in inventory and amounts due from customers.

If net working capital is not carefully managed, an expanding profitable business can run out of cash and fail.

The net working capital formula for a small simple business operation is the amount of funding needed to finance inventory and amounts owed by customers, offset by amounts owed to suppliers. The formula be stated as follows:

Net working capital = Inventory + Accounts receivable – Accounts payable

Additional information on net working capital can be found in our working capital tutorials.

For further information on the meaning of this term see the Wikipedia definition.

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Last modified March 23rd, 2016 by Team

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