Net Working Capital

A measure of short term liquidity

What is net working capital?

Simply put, net working capital is the difference between non-cash current assets and non-debt current liabilities. This means that net working capital equals current assets (less cash) minus current liabilities (less notes and loans payable). Net working capital is a measure of a company’s liquidity. The ideal position is to have more current assets than current liabilities, and thus have a positive net working capital metric.


Net Working Capital = Current Assets (less cash) – Current Liabilities (less debt)

Setting up the net working capital schedule

At the very top of the working capital schedule, reference sales and cost of goods sold from the income statement for all relevant periods. These will be used later to calculate drivers to forecast the working capital accounts.

Under sales and cost of goods sold, lay out the relevant balance sheet accounts. Separate current assets and current liabilities into two sections. Remember to exclude cash under current assets and to exclude any current portions of debt from current liabilities. For clarity and consistency, lay out the accounts in the order they appear in the balance sheet.

Create subtotals for total non-cash current assets and total non-debt current liabilities. Subtract the latter from the former to create a final total for net working capital. If the following will be valuable, create another line to calculate the increase or decrease net working capital in the current period and the previous period.

Populate the schedule with historic data, either by referencing the corresponding data in the balance sheet, or by inputting hardcoded data into the net working capital schedule. If a balance sheet has been prepared with future forecasted periods already available, populate the schedule with forecast data, as well, by referencing the balance sheet.

If future periods for the current accounts are not available, create a section to outline the drivers and assumptions for the main assets. Use the historic data to calculate drivers and assumptions for future periods. See the table below for common drivers used in calculating specific line items. Finally, use the prepared drivers and assumptions to calculate future values for the line items.

Common drivers used for net working capital accounts

  • Accounts Receivables: Accounts Receivable Days
  • Inventory: Inventory Days
  • Other Current Assets: Percentage of sales, growth percentage, fixed amount or increasing amount
  • Accounts payables: Accounts Payable Days
  • Other current liabilities: Percentage of sales, growth percentage, fixed amount, increasing amount

Accounts receivable days, inventory days and accounts payable days all rely on sales or cost of goods sold to calculate. If either sales or COGS is unavailable, the “days” metrics cannot be calculated. When this happens, it may be easier to calculate accounts receivables, inventory and accounts payables by analyzing the past trend and estimating a future value.

Learn more!

The working capital schedule is a strong element of financial statements, but it also relies on other core statements. Read more about the other elements that populate financial statements:

  • Core Statements
  • Balance Sheet
  • Financial Modelling Overview